Domestic mutual fund managers are riding high on automobile stocks, with the enthusiasm for the sector, hit hard by falling demand, COVID-19 and semiconductor shortage, at its highest level in four years in the hope of recovery.
Automobile stocks now account for 7.8 percent of the total equity assets under management of mutual funds, the highest in 44 months, data compiled by brokerage firm Motilal Oswal Financial Services shows.
The renewal of interest in the sector has been steady after it slipped to a multi-year low in August 2021 when automobile stocks had a 5.9 percent weight in mutual fund portfolios, data shows.
Not only domestic mutual fund but foreign portfolio investors have also been lapping up auto stocks. The weight of automobile and auto ancillary stocks in India portfolio of foreign investors has risen to 4.9 percent in August from 4 percent in January.
Shares of automobile companies have benefitted from the bullishness, with the Nifty auto index surging 20 percent in 2022, making it one of the best- performing sectors this year.
Individual constituents of Nifty Auto such as TVS Motor, Tata Motors, Maruti Suzuki India, Bajaj Auto, Eicher Motors and Mahindra & Mahindra have risen 14-64 percent, so far, in 2022.
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In the fast lane
Investors are betting that after a near four-year downcycle in the domestic automobile market, the sector is on the cusp of a new business cycle.
Automobile sales plummeted 33 percent in 2021-22 when compared to sales in 2018-19, according to data by the Society for Indian Automobile Manufacturers.
The sharp decline in automobile sales over the past four years was triggered by weakness in demand due to high cost of vehicle ownership and the COVID-19 pandemic.
“We expect demand for passenger vehicle (PV) and two-wheeler (2W) segments to remain robust in the medium term, led by improving economic prosperity in urban and rural markets, ahead of the festive season,” brokerage firm Sharekhan said in a recent note.
Also read: World Bank sees rising risk of global recession in 2023
Signs of a revival are already apparent with domestic sales surging 33 percent in April-August to 8.2 million from the same period a year ago.
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Festive cheer
The recovery is being led by passenger vehicles and two-wheelers, with both segments recording 30 percent and 33 percent growth, respectively, in the first five months of the current financial year.
Going ahead, industry experts are betting big on the festival period to provide a springboard for automobile companies toward strong growth in the remainder of 2022-23.
“It is expected that automobile demand in the domestic market should further recover during FY 2022-23,” Maruti Suzuki said in its annual report for 2021-22.
The improvement in availability of semiconductors, a key component, is adding to optimism over production catching up with demand and a drop in waiting period for customers.
Analysts expect a further upside given that the new business cycle is still in its infancy and in the past, such cycles ran for more than three years. Foreign investors are still underweight on the sector but there is scope for their investments to rise in the coming years, they said .
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