BSE Sensex scaled a new high last week and crossed a landmark of 60,000 for the first time. Investors have made money across the board in large caps, mid-caps, small-caps and even penny stocks. Even at the sector level, the rally has been fairly broad-based, be it cyclicals like metals, real estate and infrastructure, or structural growth sectors like FMCG and media.
The only sector that continues to lag is Auto, plagued by its own set of issues. This is quite strange given that discretionary consumption stocks in general have done quite well. Segments like fashion, jewellery and electrical equipment have witnessed demand sore through the roof. On the other hand, stocks like Maruti Suzuki are down 9.6 percent YTDCY21, while Hero Motocorp is down 8.7 percent. Pretty much all stocks have underperformed the index.
The key question is - what are the issues at hand?
a) Demand slowdown: it could be a faltering monsoon or a slowing rural consumption story, but the momentum definitely seems to have been affected. Tractor sales for both the leading players was down double digits, on a month on month basis while two wheeler sales were also soft. Hopefully the festive season will lift the spirits but the situation from a demand perspective looks grim right now.
b) Chip shortage: Semiconductor issues are something that have crippled the automotive industry not just in India but globally. These chips, which are necessary for a variety of critical functions, are in short supply, forcing production cuts across manufacturers. The situation is expected to remain critical for the next few months before starting to improve in January ’22.
c) Maruti’s market share loss: In the last few months, Maruti has been consistently losing market share largely due to a slow new product launch schedule especially in the compact SUV segment. We would expect the leader to try and arrest the situation soon by a plethora of measures, which may even impact margins. This will be another key thing to watch out for.
d) Metal prices: This has been one of the key factors, which has impacted profitability of the auto companies in the recent months. Globally, the metal prices have been strong due to supply chain issues and demand surge on the back of the global economic recovery.
The point is what should an investor do at this juncture? I believe this is one of the best times to buy in the sector. The best businesses are best bought at the worst of the times. At the peak of the cycle, valuations are going to be so prohibitive that drawing up conviction shall be difficult.
Moreover, apart from valuation, most of the issues are short term in nature, which will automatically reverse in the next couple of quarters. None of the problems seem to be long lasting at the moment, which essentially means that they are cyclical and not structural. The fundamentals remain strong, good and clean.
Do an exercise and calculate the returns that you would have made by picking up these same auto stocks at the peak of the issues in the second half of 2018. The results would surprise you.
So swim against the tide and make hay while the sun shines.
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