Auto sector has been one of my favorite sectors to invest ever since I started building my portfolio in 2014. One continues to come across more and more exciting investment prospects in this sector . Growing domestic demand and rising exports in this sector has created great shareholder wealth in the past and I believe the trend should be no different in coming years.
I have been extremely bullish on auto sector and with our big bets being Eicher, Bharat Forge, Ashok Leyland, Motherson Sumi, SML Isuzu. This sector forms approximately 20% of our total stock portfolio.
Even the demonetization crisis was just a small speed-breaker in the long term growth story of this sector. Most of our domestic focused auto holdings have managed to wither this storm exceptionally well and have continued to post stable sales in last 3 months. Globalized businesses like Bharat Forge and Motherson Sumi have been doing fairly well with pickup in sales across Europe and the US.I consider the recent acquisitions by these two companies to be the icing on the cake & remain extremely bullish.
I continue remain invested with the belief that this sector has many years of healthy growth ahead. If our GDP grows even at 7- 8% avg for the next decade, we can continue to see double digit volume growth. Add to it price hikes similar to inflation rate and we can easily see revenue & profit growth rates in mid to high teens, which is really good for largecap stocks.
Now coming to the most important question- Do these stocks merit investment at these prices, after the recent run-up and are valuations favorable for investing?
The best time to buy was in November-December when Nifty was near 7900, when these stocks were a lot lower because of fear-mongering by the fake-news cabal. We used this opportunity to add to our favorite stocks and the bet has paid off very well.
Increased our holding in Motherson Sumi by 20%. Demonetization can’t hit finances of this company as most of their plants in Europe!! 😀
— Sumit Sethi (@Sethinomics) November 15, 2016
Ashok leyland, SML & Escorts too have withered the demonetization storm quiet well.No big shock in November sales data.
— Sumit Sethi (@Sethinomics) December 1, 2016
Increased holding in SML isuzu by 25%.I believe stock has fallen more than what is justified.
— Sumit Sethi (@Sethinomics) November 28, 2016
But as it is a common saying that great prices and great news rarely come at the same time. So it is only natural that stocks are trading significantly higher than those levels now that we have seen most auto stocks report decent sales data and q3 earnings. Now that the Nifty is also within 5% of its all time highs, one cannot expect to get screaming bargains among widely tracked front-line stocks. However, lot of these auto stocks are still widely off from the peak valuations they enjoyed in 2015-16 as i pointed out in this tweet-
Motherson Sumi was trading at 50 P/E last yr before the crash. Fell to sub-25x last month. Even if goes to 40x again, it will be at 500.
— Sumit Sethi (@Sethinomics) December 8, 2016
Similar case can be made for other stocks auto majors too that have seen volume growth & profit growth but not enough price appreciation in last two years.
So even if valuations may not be very cheap, I believe there is a strong case for investing as we will be needing ever increasing amount of trucks, buses,cars tractors etc as we march towards being developed economy over next decades. After all, stocks like Eicher and Maruti were not exactly cheap even two years ago. Still they managed to deliver stunning growth and have approximately are up 48% and 74% respectively in last two yrs compared to Nifty which is up 0.3% in the same period. This shows how growth and quality combined together can lead to decent stock returns even in adverse market conditions.
I believe auto stocks will remain market beaters & even the largecap names will outperform Nifty returns, which itself i believe should hit all time highs soon and eventually head towards 11000 by end of this year or early 2018.
Disclaimer- Views Biased. We have holdings in all stocks discussed here. Blog for informative purposes and does not constitute investment advise. Read full disclaimer here