Auto index rallies to record high amidst tepid market conditions

Auto index rallies to a new high
Auto index rallies to a new high

by 5paisa Research Team Last Updated: 2022-07-08T17:07:26+05:30

In the last few weeks, a lot has bene working for auto stocks. In fact, if you look at the stocks of automobile companies on the BSE, the S&P BSE Auto index managed to scale a fresh record high in intraday trades. Specific stocks like Mahindra & Mahindra and Tube Investments of India have also managed to hit their respective highs with both stocks trading at their highest ever levels. At a level of 27,781, the BSE Auto index managed to surpass its previous high of 27,271 which the index had scaled in November 2021.

The returns on the auto index almost sound anomalous, especially if you look at it in the light of the returns on the overall benchmark Sensex. For FY23 till date, i.e. from April 2022 to early July 2022, the BSE Auto index has outperformed the general market by a huge margin. While the BSE Automobile index was up 15.5% in FY23 till date, the benchmark Sensex was actually down 7.6%. In relative terms, that is an outperformance of nearly 23.2% with substantial support coming from most of the auto companies.

If you look at the auto stocks in the last 3 months, there are several heavyweights in the auto space that have done extremely well. For instance, stocks like M&M, Eicher Motors, TVS Motors, Ashok Leyland and Hero MotoCorp have all rallied anywhere between 16% and 37% in a rather short span of time. That is an amazing returns in a span of just about 3 months, especially if you consider that these very auto stocks have been under pressures since 2019 and the pressure continued all the way through the pandemic and beyond.

What exactly has driven this sharp rally in the auto stocks. Firstly, there is the strong monsoons prospects that is driving the auto stocks. Normally, a robust monsoon has a direct impact on rural income levels as that is when the Kharif output is at record levels. Normally, robust levels of rural income are positive for sectors like tractors, commercial vehicles, two wheelers, entry level passenger cars etc. Many of these segment stend to witness cyclical demand with a surge in demand coming around the Kharif period and the festive season.

Apart from the monsoons, the sharp cuts in the excise duties on petrol and diesel; in two rounds, also resulted in greater auto affordability. That is an important index of auto demand, especially as it eases the household budgets and boosts auto demand. The cut in excise duty on fuels (Rs8/litre on petrol and Rs6/litre on diesel) in May 2022 sharply reduced the running cost of automobiles and boosted demand. At the same time, the global fall in crude oil prices and expectations of softening also helped to keep auto demand buoyant.

That is just one half of the story. In the last few quarters, auto companies are facing the wrath of rising input costs, mainly steel. Now several things are working in the favour of the auto companies. For instance, the sharp fall in the steel prices has reduced the cost of auto manufacturing. In addition, the improving chip availability also means that auto companies will not be forced to shut down factories any longer due to a shortage of the all-important microchips that power most of the modern day cars. Central banks may also tame rates.

FY23 is expected to be positive for the auto companies in terms of volume pick-up and pricing power. For example, the expected volume growth in FY23 is likely to be around 20% for commercial vehicles (CVs), 20% for passenger vehicles (PVs), 11% for two-wheelers and a more modest 4% for tractors. Recent data points indicate that while 2-wheelers are still seeing tepid sales, the light commercial vehicles (LCVs) and the passenger vehicles (PV) are seeing good traction. That is the good news on the auto front.

The auto sector looks up against a bring future this year. With good prices for Rabi output, cash flow with farmers is good and solid MSP approvals for Kharif is already approved. That would mean a bumper Kharif and good pricing for farmer, resulting in higher auto demand. It looks like finally happy days are here again for auto companies.

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