India Automobiles Sales in Slow Lane and How Robust is the Emerging Market Consumption Story
The news flow for Indian Auto Industry is turning from bad to worse over previous many months and over last one year and a little more, there have been multiple reports highlighting poor sales numbers, decline in numbers for vehicle registrations, sharp increase in inventory at dealers and liquidity crunch potentially impacting sales of vehicles. June sales numbers reported on 1st of July has not been an exception and that is clearly reflecting in the performance of auto stocks such as Maruti Suzuki, Hero MotoCorp, Bajaj Auto and Eicher Motors.
From time to time, this has led to a discussion on investment rationale in several stocks that bad news is fully in their price now and after the huge correction in many of these names, the market expectations have become more reasonable on how their business and financial performance will be. While this is somewhat true, we think that upcoming festive season sales for the industry will be the real test because these figures will actually tell you how inventory has moved to end customers and how an apprehension of poor monsoon impacting Auto Sales will play out?
There are several stocks where there are many moving parts. For example, it is important to highlight here that while Tata Motors has been doing well in India for the last many quarters, several more factors other than domestic sales in Indian markets are important such as sales in other geographies and prospects for JLR for this stock. Similarly, Mahindra & Mahindra (M&M) has huge presence in SUVs but is also a conglomerate and it is also big in agriculture farm equipment such as tractors.
A clearly visible slowdown in sales is not the only challenge for Indian Auto companies. Almost on a daily basis, there are reports and news articles in the media that there are going to macro changes in the industry such as Government is insisting that EVs should become the norm much more quickly than the industry is prepared for, there are companies like Maruti which are completely exiting the diesel engine based vehicles space. More importantly, the news flow is not just limited to a few sub-sectors and particular segments and this has been a trend that is visible for the entire ecosystem.
There are two ways to look at it. One is that the bad news is in the price and though the sales numbers may not look great, the stocks may not react much because investors have factored in the slow down. It can be argued on the basis of how news flow and some of these stock prices have been diverging that after the severe correction, now the investor expectations on business prospects of these companies and financial performance have become much more reasonable. After a significant correction, bad news doesn’t matter that much and incremental selling is limited which got proven how markets reacted to June sales numbers.
The bigger question is related to consumer demand. One way to look at this is that there may not be any huge structural challenges for discretionary demand in India and challenges related with consumer demand may only be temporary which implies that for some stocks at least in this sector, these are not particularly bad levels for the long term investors to get in. However at the same time, it is also true that investor can not completely ignore the monthly auto sales numbers and quarterly financial performance and with a slowdown in economy and structural challenges in the auto industry, it would not be wise to remain oblivious to these changes. The discretionary demand is relatively safer in EMs but investors need to keep an eye on these data points if they don’t want to miss out on the evolving trajectory of consumer demand in EMs.
EM Alpha LLC
For more EMAlphainsights on Emerging Markets, please visit https://emalpha.com/insights/. To know how you can use EMAlpha’s unstructured data on Emerging Markets for better investment decisions, please send us an email at firstname.lastname@example.org.
EMAlpha, a data analytics and investment management firm focused on making Emerging Markets (EMs) accessible to global investors and unlocking EM investing using machines. EMAlpha’s focus is on Unstructured Data as the EMs are particularly susceptible to swings in news flow driven investor sentiment. We use thoroughly researched machine learning tools to track evolving sentiment specifically towards EMs and EMAlpha pays special attention to the timely measurement of news sentiment for investors as these markets can be finicky and sentiment can be capricious.Our team members have deep expertise in research and trading in multiple Emerging Markets and EMAlpha’s collaborative approach to combining machine learning tools with a fundamental approach help us understand these markets better.
This insight article is provided for informational purposes only. The information included in this article should not be used as the sole basis for making a decision as to whether or not to invest in any particular security. In making an investment decision, you must rely on your own examination of the securities and the terms of the offering. You should not construe the contents of these materials as legal, tax, investment or other advice, or a recommendation to purchase or sell any particular security. The information included in this article is based upon information reasonably available to EMAlpha as of the date noted herein. Furthermore, the information included in this site has been obtained from sources that EMAlpha believes to be reliable; however, these sources cannot be guaranteed as to their accuracy or completeness. Information contained in this insight article does not purport to be complete, nor does EMAlpha undertake any duty to update the information set forth herein. No representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of the information contained herein, by EMAlpha, its members, partners or employees, and no liability is accepted by such persons for the accuracy or completeness of any such information. This article contains certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential,” “outlook,” “forecast,” “plan” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of certain investment strategy. All are subject to various factors, including, but not limited to, general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting the operations of the companies identified herein, any or all of which could cause actual results to differ materially from projected results.