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
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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.
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