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Teji Mandi

Updated on: Monday, November 08, 2021, 04:05 PM IST

Teji Mandi Explains: Auto sector under pressure but stocks continue to register returns

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This Diwali is different from the ones we experienced in the last two years. Businesses are returning to pre-COVID levels except for one sector that’s still gloomy. The auto sector is still staring at an empty showroom. It was believed that the problems would decrease for the automakers once the COVID-19 wave fades, but it’s not over yet. Semiconductor shortage, rising fuel prices and increase in aluminium and steel price have continued to add pressure on the automakers’ shoulders.

Mountain Of Problems?

The semiconductor shortage wasn’t over, and another one joined the pile of troubles for automakers. As we know raw materials form the crux of the automobile body, in case the prices soar, then the input costs for the auto companies increase significantly since everything is produced in bulk. Since 2020, aluminium prices have doubled and created additional pressure. Over the years, aluminium usage has increased to make vehicles lighter and improve fuel efficiency.

Meanwhile, magnesium, which is again a key element that's used for fuel tank lids, gearboxes etc., is also facing supply constraints, due to the power crisis in China. 85% of magnesium comes from China, and if supply is adequate, then the global car production would have to take a supply knock.

Nifty Auto Index Registers Gains This Year

Even as the auto sector has been under immense pressure, somehow the performance of the Nifty Auto index was above expectations. Only two stocks from the index - Hero MotoCorp and Amara Raja Batteries - have given negative returns in the last year.

Experts are positive about the auto space after the government’s big electric vehicle push. It’s believed that the worst of chip shortage and raw material cost inflation will get better by early next year. The economy is steadily reopening, and the bookings in the last few months have risen too, said the experts.

What’s In Store For The Future?

Indeed, the automobile industry is operationally under pressure from all sides, but the dream of electric vehicles on the Indian roads fuels positivity towards auto stocks. Once electric vehicles land in the showrooms, it will reduce a few pressure points. For instance, fuel will not be needed anymore. Some of the raw materials cost inflation won’t bother auto companies. A lot will change in the industry, and the investors are hopeful of the declining pressure on the automobile space.

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Published on: Monday, November 08, 2021, 04:05 PM IST
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