Auto Sector – Light at the End of the Tunnel.
2 min read
July 2015 – Maruti Suzuki became the 1st Indian company to outgrow the market cap of its parent ( Suzuki). All global funds wanted to own a piece of Indian autos.
Today, Volumes have fallen by 17% – 18% YOY for Passenger Vehicles and 2 Wheelers and 47% YOY for trucks in the last 12 to 18 months – the steepest fall in the last four decades because of economic slowdown.
The Auto Industry is notoriously cyclical. Past data suggests that every decade sees 7 to 8 years of expansionary auto sales and a few years of muted sales before a recovery. A usual Auto recovery happens like thus – 2W’s followed by Passenger Vehicles(PVs) followed by trucks
Here is some evidence that suggests this time its going to be different.
• Transition to BS 6 and new insurance norms for 2Ws is going to lead to a 15% – 30% increase in price of 2Ws whereas the impact on PVs will be 5% to 8%.
• Covid 19 is expected to add a significant tailwind to personal mobility. With only 10% of Indian households owning cars vis a vis 50% owning 2Ws, PVs are well placed for a recovery.
• Average age of a PV including cabs in India is 4.75 years before a replacement cycle kicks in. With the average age today at 5.5, data suggests that we are at the cusp of a replacement cycle.
• Trucks have already seen 2 straight years of downturns . Historical data suggests that trucks have an average downcycle of 3 years in a decade, implying we are close to a recovery. Further with a scrappage policy in the works, a revival in trucks could come faster than expected.
Data suggests that we are near a bottom for the auto industry cycle and could see significant revival in PVs and Trucks in coming quarters.
What are your top picks in the auto sector?
Via – Priyam Shah
