Outpacing broader market benchmarks like the Nifty 50, the BSE Auto index has risen to new heights in keeping with the rising profile of automobiles in the country.
23 Jan 2025 | 4124 Views | By Ashutosh Radhey Shyam
The perception of the automobile sector among investors has undergone a tectonic shift. What was once viewed as a "necessity-driven" industry has evolved into one "fueled by aspiration." Automobiles are no longer just tools for transportation but symbols of status and lifestyle. This evolution has positioned the auto sector as ...
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The perception of the automobile sector among investors has undergone a tectonic shift. What was once viewed as a "necessity-driven" industry has evolved into one "fueled by aspiration." Automobiles are no longer just tools for transportation but symbols of status and lifestyle. This evolution has positioned the auto sector as a vital cog in India's consumption-driven growth story, making it an indispensable component of domestic and foreign fund managers' equity portfolios. With its wide-ranging ecosystem—spanning vehicle manufacturers, auto ancillary companies, vehicle financiers, and even listed automobile dealerships—the automobile sector offers a compelling investment narrative.
Market Capitalisation and Returns: The Auto Sector's Ascendancy
The total market capitalisation of companies related to vehicle manufacturing has reached an impressive Rs 30 lakh crore ($357 billion), accounting for nearly 7.5% of India's total market capitalisation. Investor interest has notably intensified over the past five years, driven by premiumisation-fueled revenue growth and margin tailwinds. This enthusiasm is reflected in the performance of the BSE Auto Index, which delivered a stellar annual return of 23.3% over the last five years, significantly outpacing the Nifty 50's 14% annual return.
In absolute terms, the BSE Auto Index has surged 191% in the last five years, compared to a 95% rise in the Nifty 50 index. This remarkable performance has been spearheaded by individual stocks like TVS Motor, Mahindra & Mahindra, and Tata Motors, all of which have delivered returns exceeding 300% over this period. TVS Motor, in particular, stands out as one of the decade's best-performing stocks in the auto space, delivering a whopping 994% return over ten years, thanks to its consistent performance in both volumes and margins and its early investments in electric vehicle (EV) technology.
Historically, the BSE Auto Index traded at a discount to the benchmark Sensex. However, it now commands a premium, trading at a price-to-earnings (P/E) multiple of 23.24, compared to the Sensex’s P/E of 22.85. About a decade ago, the auto index was at a 20% discount to the Sensex—a stark indicator of the sector's transformation.
Earnings Growth: The Pillar of Stock Performance
As the adage goes, the equity market is a slave to earnings, and the auto sector has delivered handsomely on this front. Supported by a richer product mix, volume growth, commodity cycle tailwinds and pent-up demand from the COVID period, the sector has witnessed robust revenue growth. Over the last eight quarters, six recorded double-digit revenue growth for auto and ancillary companies in the BSE 500 universe, with a peak growth rate of 31% in Q2 FY23. Operating profit growth has also been consistently strong, exceeding 20% in five consecutive quarters starting from Q2 FY23.
In FY24, the auto and component sectors in the Nifty 50 companies reported an astounding earnings growth of 113%, compared to the index's overall growth of 20%. Looking ahead, earnings growth for the auto sector is projected at 16% for the current fiscal year and 12% for the next fiscal year.
Institutional Investors’ Growing Bets
The auto sector's earnings momentum and revenue growth have spurred institutional investors to increase their exposure to auto stocks. Among domestic fund managers, the auto sector now holds an 8.5% weightage, making it the third-largest sector by weight after private banks stocks and technology stocks. Domestic funds are overweight on auto stocks by 90 basis points compared to the BSE Auto Index's weightage. Notably, nine out of twenty fund houses are overweight on the auto sector, with Kotak Mahindra AMC and Motilal Oswal AMC leading the pack with allocations exceeding 10%.
Foreign investors, too, have been raising their stakes in the Indian auto sector at a record pace. According to the National Securities Depository Ltd (NSDL) data, auto sector weightage in foreign portfolio investors’ (FPI) holdings in India reached an all-time high of 8.10% in July 2024 before moderating to 7.26% in November 2024. Year-on-year, the auto sector’s weightage in FPI portfolios has increased by 42 basis points, a significant uptick from the long-term average weightage of 6%. The auto sector is now the third-largest in FPI portfolios, trailing only financial services (28.5%) and IT (9.93%).
The equity value of FPIs in the auto sector grew by 33% over the last year, reaching $62 billion by November 2024, while the total FPI equity value rose 26% to $850 billion. Within the MSCI India Index, which serves as a benchmark for many FPIs, the consumer discretionary category—dominated by auto stocks—accounts for 12.9%, with M&M holding the highest weight at 2.14%.
Key Catalysts Driving Investor Interest in the Automobile Sector
The auto sector’s emergence as an investor favorite can be attributed to several transformative factors that underscore its long-term growth potential:
India's Automotive Sector: Following the Growth Trajectory of Global Giants
India’s current economic position bears a striking resemblance to the early growth phases experienced by nations like China and South Korea, offering a roadmap for the country’s potential automotive boom.
Owning a vehicle in India is no longer just about utility—it is increasingly a lifestyle choice. This aspirational shift is a key factor driving the premiumisation trend across vehicle categories. As automakers introduce feature-rich models and luxury vehicles, the sector continues to attract institutional fund managers eager to tap into India’s growth story.
The Indian automobile sector is no longer merely a necessity-driven industry—it has evolved into a cornerstone of India’s growth narrative, characterised by aspiration, premiumisation, and innovation. With rising investor confidence, robust earnings growth, and structural tailwinds like EV adoption and export competitiveness, the sector is set to play a pivotal role in the nation’s economic expansion.