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Auto stocks on BSE Sensex biggest wealth creators since 2008 financial crisis

LiveMint logoLiveMint 04-08-2017 Ami Shah

Mumbai: A Rs1,000 investment in Tata Motors Ltd shares made during the dark days of the global financial crisis would have grown 15-fold by now, as India’s largest automaker went on to gain the most in the Sensex’s post-2008 surge.

Since the Sensex tumbled to 8,509.56 points on 27 October 2008—then a two-year low—the 30-share benchmark stock index has gained 279% in the years that followed. In the same period, Tata Motors has risen a whopping 1,458%.

Tata Motors tops the list of Sensex gainers in the period, but it is by no means the only automaker in the group. Auto stocks have been the biggest wealth creators since the financial crisis, with the BSE Auto index the best performing sectoral index since then, posting returns of 955%. 

Among Sensex constituents too, four of the top six performing stocks during the period have been auto stocks: Tata Motors, Maruti Suzuki India Ltd, Bajaj Auto Ltd, Mahindra and Mahindra Ltd. Each of them has gained more than 1,000% since then. 

A consumption boom and a growing middle class have pushed up car sales in the world’s second-most populous country. New model launches, particularly in the compact SUV (sport utility vehicle) segment, higher disposable income, benign interest rates and lower fuel prices have combined to drive up auto sales every year in the past decade. 

“The domestic market is expanding,” said Mark Mobius, executive chairman at Templeton Emerging Markets Group, Franklin Templeton Investments. “With per capita incomes going up—more people can afford a motorcycle, more people can afford automobiles.”

“And then, Indian companies have been particularly good at exporting—both the small two-wheelers as well as the automobiles,” Mobius said. He also pointed to Tata Motors’s 2008 acquisition of Jaguar Land Rover as boding well for the firm. 

For the Tata group flagship, Jaguar Land Rover, acquired from Ford Motor Co. in July 2008 for $2.3 billion, has been the cash cow. It accounts for over 80% of revenue and almost all of the profits for the consolidated entity. 

According to data from industry body Society of Indian Automobile Manufacturers (SIAM), domestic sales across vehicle categories for the auto industry at large have risen in all six fiscal years to 2016-17, while exports rose in five of the six years. Also, from 2007-08, aggregate sales across vehicle categories—including domestic sales and exports—have jumped 133.77% to 23.45 million units. 

“Collapse of the oil prices in recent years has also helped the automobile industry immensely. That had led to better affordability of automobiles,” said Raamdeo Agrawal, joint managing director of Motilal Oswal Financial Services Ltd.

Brent crude oil traded at a record high of $147.5 per barrel in July 2008. Since then, prices have fallen 64.49% to trade at $52.38 per barrel on Thursday. 

Consumers were protected from volatile crude prices through subsidies in the initial years, but the declining oil prices prompted the government to gradually remove them, and finally eliminate them. Subsequent declines in crude prices have been followed by duty hikes, but overall, retail fuel prices are lower.

“Even interest rates have come down, bringing down the EMI (equated monthly instalments),” added Agrawal. 

Agrawal said the competition structure was interesting, with a few companies having higher market share in various segments: Maruti Suzuki holding a majority market share in passenger car segment, Hero MotoCorp Ltd leading the motorcycle segment and Mahindra having the top market share for tractors. 

“In an open economy, when the competition is limited, the pricing power by these companies ensures good margins. This, in turn, drives their earnings. Besides, there is good growth,” said Agrawal. 

“It is the best of both worlds for these companies. With the consumption theme continuing, auto stocks will continue to do well,” he added.

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