Auto stocks are displaying a resurgence, driven by several factors including lower metal prices, decreased gasoline costs, favourable government policies on electric vehicles and seasonal product demand. Over the past year, both metal and crude oil prices have witnessed declines. Auto stock prices and crude oil prices are interconnected, as reduced crude oil prices lead to lower operating costs for cars, resulting in increased demand. Furthermore, the decrease in metal prices reduces the raw material costs for automobile businesses, which positively impacts the profitability of car stocks.
Simultaneously, the Indian government has unveiled its strategy for electric vehicles, including the implementation of a battery-swapping strategy to accelerate the adoption of EVs. This announcement has further contributed to the appreciation of car stock values. This has also created an anticipation of increased demand and automobile sales and has contributed to the rise in car stock prices.
Factors behind the Rising Auto Shares
Let us discuss some reasons that cause a rise in the auto share prices-
Prominent manufacturers of passenger vehicles and two-wheelers have experienced a significant increase in their export volumes, primarily driven by demand from Latin America, Africa and South-East Asia. Also, Global Companies are turning to India for sourcing parts and components as part of their strategy to diversify their supply chain beyond China. This trend highlights India's growing importance as a sourcing hub for global players in the automotive industry.
As infrastructure projects gain momentum, there is an anticipated increase in demand for commercial vehicles. The government's consistent focus on infrastructure spending is driving this surge in demand. Moreover, fleet owners are likely to seek replacements for their aging trucks, which will further contribute to the demand growth. However, it is worth noting that rural demand has yet to pick up, and monitoring its progress will be crucial for the overall recovery of the sector.
Favourable Government Policies
In the Union Budget 2023, the government has increased the budget allocation of FAME II by 78 %. If commercial vehicles and private vehicles that are more than 15 and 20 years old, respectively, fail the fitness test, then they will be required to be scrapped. Additionally, there is a charge of green tax levied at the time of fitness renewal. This will dis-incentivize the use of older vehicles. Hence, the automobile industry has a bright future over the long-term period.
Rising Demand for Electric Vehicles
The increasing demand for electric vehicles is playing a significant role in driving the growth of the Indian automotive market. There is a rising concern among individuals for climate change and sustainability. Hence, the need for alternative energy such as electric vehicles arises.
Demand in the MUV/MPV and Van segment
In India, Multi-Utility Vehicles (MUVs) or Multi-Purpose Vehicles (MPVs) are extensively utilized for passenger transportation, particularly by large families. This segment is primarily controlled by a small number of major players that hold more than half of the overall market share.
The standout feature of MPVs/MUVs is their capacity to accommodate more than five individuals in a single vehicle, making them a preferred choice for passenger transport. Moreover, the availability of Compressed Natural Gas (CNG) as a fuel option for these vehicles reduces operating costs and significantly improves profit margins for passenger transport companies. Accordingly, the demand for MPVs/MUVs is expected to remain high in the passenger transport industry in the foreseeable future.
Trends in the automobile market
The automotive industry is a fiercely competitive market that is experiencing growth due to various factors. These factors include the rise in disposable income, availability of several financing options, increasing urban population and the presence of close substitutes in each segment that offer advanced technological features such as active and passive safety systems, comfort enhancements and high-performance vehicles.
Additionally, the market benefits from the dynamic Indian public transportation network and the expanding logistics landscape, which contribute to the overall growth of the sector.
The Indian automobile market has experienced growth in recent years; however, the economic slowdown caused due to the pandemic delayed the revival of the otherwise flourishing sector.
The automobile market is anticipated to witness growth in the coming years due to several factors. These include the increasing preference for Sports Utility Vehicles (SUVs), a rising demand for commercial vehicles in the logistics sector, and pent-up demand. Furthermore, electrification of vehicles, particularly in the three-wheeler and small passenger car segments, is expected to play a significant role in driving market growth in future for the sector.