Job losses in auto sector are ruling the headlines of newspapers. As per Federation of Automobile Dealer Association (FADA), 32000 people lost their jobs in last 18 months.
Worse, if the slowdown continues, job losses can pile to a worrisome 10 lakh. As the sector contributes to 49% of the manufacturing gross domestic product (GDP) of India, a prolonged slowdown would be negative for economy.
A prolonged slowdown will also lead to additional lay-offs. India’s unemployment rate at 6.1% for FY18 is already alarming. That means 6 out of 100 people are not employed. Any addition to this unemployment number coming from automobiles sector will be alarming for our youth. Given the situation, government has not done much to come to the rescue as yet.
Low Consumer Sentiments Leading to the Job Losses…
Prices of two-wheelers & passenger vehicles are on the rise. First was the increase on account of new insurance guidelines in late FY18. This was followed by new safety norms leading to installing of anti-braking system. And the latest cost increase coming from the transition to the BS VI regime. The rising cost of ownership, subdued rural and urban wage growth and suggestion of NITI Aayog to convert all two-wheelers into electric by 2025 have dented consumer confidence. This has impacted sales volumes at auto majors.
Will the Sentiments Improve?
We believe this is a temporary blip and the sentiments should improve going ahead. We derive at this thesis on account of three factors.
First being the high under-penetration of two-wheelers and cars in India as compared to other emerging economies.
Source: ETAuto.com
Source: Hero Motocorp Investor Presentation
Second being the increasing culture amidst Indian women to take up jobs, in-turn creating demand for ownership of second vehicle in the house.
Third being the thrust on electric vehicles by NITI Aayog seems to be ambitious. Government will need to draw a roadmap to implement electric vehicle in a phased manner and it is well aware that it can’t be done till 2025. As auto sector employs more than 50 lakh people, an un-planned shift to electric vehicles will be doomsday for the auto industry and the people it employs. Hence, government is most likely to not make some hasty decisions and in the near term dole out incentives to boost demand for automobiles.
When will the Sales Volume Recover?
Though demand may remain subdued in the near-term, we are of the firm opinion that demand will recover in the long-run on account of reasons as mentioned above.
Most of the automobile stocks are trading below their ten year average price/earnings ratio. Pessimism is the best time to buy these stocks and one can make the most of this correction to earn decent returns in the long run.
At WiseBasket, we have constructed a basket named Contra Bets. It contains stocks in automobile, pharmaceutical and PSU sector. The basket will enable you to not only take advantage of the cheap valuations at which these stocks are trading but also earn healthy dividends year after year. Further, the basket will help you diversify your risks across various stocks instead of taking exposure to a single stock.
Happy Investing!