Automobile

What are Auto Stocks?

The automobile sector or auto sector is one of the most promising industries in India and has a huge potential given the market size of our country. The sector comprises vehicle manufacturers in segments like scooters, motorcycles, passenger vehicles, luxury/premium vehicles, tractors, trucks, buses and even Electric Vehicles (EV). In addition to vehicle manufacturers, the sector includes those providing automotive parts, batteries, and vehicle component manufacturing companies. 

This sector has always seen a very strong interest in the market, mainly thanks to the presence of some big names and its historical performance. The rising middle class and a young population have ensured that two-wheelers, four-wheelers and other vehicle segments are always making profits. Given its ability to consistently make profits, auto stocks have always attracted the attention of seasoned and those newly interested in the world of stock market investing.

However, despite its stellar run in the last few years, auto sector stocks are extremely volatile in the current market condition. This has been the case due to several factors that we will take a deeper look at while also focusing on the top auto stocks you can consider adding to your portfolio, depending on your risk appetite.

Future of Auto Sector Stocks?

India is currently the 5th largest vehicle manufacturer globally and houses the top automobile companies. India was also the seventh-largest manufacturer of commercial vehicles in 2019 and is expected to reach USD 300 billion in revenue by 2026.

Two-wheelers and passenger vehicles dominate the Indian auto sector, with a combined sales of 20.1 million in FY20. However, the auto industry is currently volatile. It is going through a significant shift, as new government-issued norms and preferences for EVs are the principal investment focus for all auto sector companies. The EV market in India is forecasted to increase by a CAGR of 36% by 2016, and EV sales, excluding e-rickshaws, in India witnessed a growth of 20% and reached 1.56 lakh units in FY20 driven by two-wheelers.

According to NITI Aayog and Rocky Mountain Institute (RMI), India's EV finance industry will likely reach Rs. 3.7 lakh crore (US$ 50 billion) in 2030. This makes the auto industry highly promising in the long-term, and investors can consider investing in Auto Sector companies but with the understanding of existing risk. Auto sector shares have seen a significant fall in the past two years, and while this presents an excellent opportunity to make long-term profits, it is also susceptible to high risk.

Best Auto Sector Stocks for Long Term?

Automobile companies are going through a change, with a higher focus on EVs and futuristic technologies. Due to present regulatory updates and rising fuel costs, the auto sector may be volatile but is still a top consideration given its ability to generate long-term value for investors. In the auto sector share list below, we have identified the best auto shares in India based on their valuation and activity in recent years. These include automobile makers and companies that manufacture tyres, automobile equipment, batteries, and technology providers that play an essential role in this industry.

Although this list mentions the top auto companies in India, investors should do their research and focus on critical aspects of any company before investing in that share.

Is It Worth Investing in Auto Stocks?

In recent years, the automobile industry has undergone a significant shift and is currently experiencing high volatility, mainly due to reasons like:

1. Rising preference for electrification and government norms promoting EVs.
2. Rising fuel and crude oil prices.
3. Disruption in the supply chain is mainly due to the shortage of semiconductor chips.
4. Changing government regulations around diesel and petrol vehicles, BS-VI emission norms.
5. External factors like COVID-19 in 2020 and Russia-Ukraine War in 2022 that has led to fear in the market.

However, this short-term volatility may not have a long-term impact, as the sector anticipates substantial growth. With the increase in EVs and new home-grown innovations in this sector, the potential for growth in top auto companies in India is large. Therefore, investors who wish to include auto stocks in their portfolios should diversify their investments in other markets. Also, before investing in any auto stock, it is important to analyze:

1. P/E ratio of the share - to understand its fair value, which is a good indicator of the share compared to its market valuation.
2. Company's financial wealth - the top auto companies may experience a revenue drop in the present scenario. Still, if their financial condition is well managed and they have managed debt well, the company is likely to cope and grow.
3. Sectoral news and updates - ensure that you understand how the company is making changes as per government rules and EV innovations. Being up to date with the latest information in the market will help you understand if the steps being taken in the present scenario will help in the future.