Expert Analysis of the Global Macro Events & News affecting the Indian Markets

Auto stocks are cruising – is this the top, is this rally justified?

Back in March 2022, no one wanted to touch automobile stocks. And the only area most experts wanted to talk about in the media was around the headwinds and the challenges the industry was facing. The war, rise in crude prices and other commodities, and semiconductor shortage warranted investors to stay away from Auto. Because of these reasons their capacity utilization and of course their results took a hit. 

14 months later, the auto index is at an all-time high, the major names like Maruti Suzuki and TATA Motors are reporting blazing results, and investors are back on the bandwagon. Let’s discuss what’s changed in these 14 months, will this trend sustain, and let’s look at some interesting data points along with relevant charts. Will try to keep this short. 

What does the Data say?

The passenger vehicle segment grew by 13% on a year on year basis. When every economist is talking about recession, here is the auto space flaring towards record highs. This isn’t just with the Auto sector, even GST data for the month of April showed a growth of 12%.

Source: ET Auto

As GDP, per capita GDP and consumption growth takes the centre stage, I couldn’t help but wonder if it would translate into auto sales. Of course, higher income and more jobs would compel the population to lean into a vehicle purchase, but at what pace (what growth can we see in the automotive space). Have the markets already priced in growth, and if you were an investor, should you enter now? 

I looked at the data from China from 2000 to 2010 when their per capita GDP expanded by 16.8% on an annualised basis, and unsurprisingly, their car sales expanded by 24% on an annualised basis during this same period. And during the 1990 to 2011 period, vehicle ownership increased by 56 times!

Coming back to India, the car ownership ratio is lowest among major economies, and even if you consider vehicles other than cars, 2W ownership is 110 per 1,000 persons. Underdeveloped metro rail network, formation of nuclear families, easy EMI’s, and socially driven reasons will certainly raise this ratio over the next 10 years.

Source: Kotak Securities; ICICI Prudential

The rally in the auto space is justified given how the underlying companies are performing. Nonetheless, Nifty Auto along with major auto makers are near an all time high and valuation ratios are elevated. Instead of auto makers, we find value in auto component makers. 

One of the major headwinds faced by automakers is chip shortage, but the demand is being squeezed out and supply should normalise very soon. The below chart shows the revenue pressure faced by global chip makers because of easing demand. 

Important Economic Events

May 16- Retail Sale, China

(Retail Sales estimates the change in the value of sales at the retail level across the country. It is an important indicator of consumer spending accounting for a significant proportion of overall economic activity)

May 16- Unemployment rate, China

(Measures the percentage of the total urban workforce that is unemployed and actively seeking employment during the reported month. It stands at 5.2%)

May 16- Eurozone GDP

(Broadest measure of economic activity and the primary indicator of the economy’s health. Stands at 1.3% for May)

May 17- Retail Sales, US

(Estimates the change in the value of sales at the retail level across the country)

May 17- CPI Europe YoY

(The Consumer Price Index (CPI) measures the change in the prices of goods and services contained in a basket of consumer items) 

Company In Focus: Embassy REITS

In this week’s episode of stock specifics, we‘re going to talk about REITs, a topic which has been in the limelight lately. For people who don’t know what REITS are, let us explain to you. We’ll also talk about one of the REITS and what recent news has made people talk about it so much. Let’s begin!

Real Estate Investment Trust, often referred to REIT, is a company that owns, operates or finances income generating real estate. Okay, let’s say you want to invest in real estate but you don’t have enough money to buy a whole building on your own. In this case you can buy a REIT. This REIT will manage the properties, rent it out to tenants and give you your share of rent. 

One thing most people are scared of when they hear about investing in real estate is liquidity, and that’s where REITS come in. These are traded on exchange just like shares and hence are very liquid. Essentially we have three REITS- Embassy, Mindspace and Brookfield. Nexus Select Trust recently got listed. 

As far as our portfolio is concerned, we have Embassy REIT in our smallcase portfolio. Embassy REIT is India’s first publicly listed REIT and largest office REIT in Asia by area. Portfolio is strategically located in India’s four key office markets of Bengaluru, Pune, Mumbai and Noida.

The company owns and operates a 45 million square feet portfolio of eight infrastructure like office parks and for city-centre office buildings. The portfolio also comprises amenities, including four operational business hotels, two under-construction hotels, and a 100-megawatt solar park supplying renewable energy to park occupiers.

Moving on to financials, the company registered revenue growth of 16% YoY, reaching 3532 Cr in FY23 from 3053 Cr in FY22. However, the margins were dampened by increased interest costs and depreciation expenses.

What makes us talk about REITS suddenly?

NSE Indices Ltd, a subsidiary of National Stock Exchange (NSE), has launched India’s first ever Real Estate Investment Trusts (Reits) and Infrastructure Investment Trusts (InvITs) Index to track their performance. The Nifty Reits & InvITs Index has a base date of 1 July 2019 and a base value of 1,000 which will be reviewed and rebalanced on a quarterly basis.

Now, coming back to the main concern, what are the sources of return if one invests in REITS. There are two sources- Rental Yield and Capital Appreciation. 

By investing in REITs and InvITs, investors can benefit from regular income generated by diversified real estate and infrastructure assets.

Anyways, that was it for this week’s stock specifics. See you next week, with a new industry and new stock. 

Green Portfolio is a SEBI Registered (SEBI Registration No. INH100008513) Research Analyst based at Ground Floor, 7/7, Darya Ganj, Ansari Road, New Delhi, 110002. For more information and disclosures, visit our disclosures page here