Where do you think the auto industry is headed in the next one to two years? What stocks would you bet on in this space?
Let me add a variable to that; the continuously rising fuel prices also have indirect and direct effects. The continuously reducing interest rates on auto loans is a positive. There are multiple factors which have been acting on the auto sector. The good thing is that all the companies in the auto sector are aware of these changes and have been proactively taking measures to handle these.
If I speak about the expected electrification trend, all the companies are doing something or the other so that they do not miss out and are left holding the baby of the thermal
in their portfolios affecting future growth.
Having said that, a lot was expected from the electrification earlier also. For multiple reasons, that has not been at the pace at which it was supposed to be but sooner or later, it has to come and that has to be accepted. In the immediate future, we are watching how the growth picks up as the unlocking has just started.
Going by last year’s experience, everybody expects a lot of latent demand which will immediately lap up the products. This time it is expected only in passenger vehicles and not as much in two-wheelers, apparently because the rural economy has also been hurt by Corona. Let us see if that stays. I do not think that will be the case and we will see demand for two-wheelers also.
One, two, three years down the line, I do not think these trends are something which will shake up the industry structure, industry composition, industry market share, industry leadership, industry managements or industry bands in a very significant way. It will be the same set of companies which have already been taking measures. They will continue to keep taking measures and continue to be the leaders there.
Demand will continue to be there and will go up over time. One will have to see what happens to the margins of the companies which remains a little less predictable as of now. What will be the cost, the R&D impacts of electrification or the change of the fuel composition, the ethanol blending in, have to be seen. As a result, if the costs go up, one has to see how much will be passed on.
In terms of electrification, we have to take note of government subsidies and as a result the lesser impact on margins. Steel prices have been going up. At some point of time, it will start coming down. Margin is something that I am not able to put my handle on.
In terms of investment advice, any good company stock should continue to be bought. Within passenger vehicles, Maruti continues to remain a great bet. It is the only pure play listed opportunity available in the passenger vehicle space though it has been losing market share in some specific segments and gaining in some specific segments. But largely 50% of the market continues to be controlled by Maruti. Within two wheelers, for no specific reason Hero Motors continues to remain a good investment opportunity. That is how I see myself looking at the automobile sector.
Do you have a call on the Sona Comstar IPO?
I have taken a look at the company. I have looked at the financials. The issue is coming out reasonably matured, even an expensive valuation.Also, the issue is a mix as has been the case with most of the other IPOs. It is a mix of dilution as well as offer for sale. If a dilution or a primary issue comes at an expensive valuation, as an investor or as a potential investor I do not mind subscribing as much at an expensive valuation because the money is ultimately going to stay within my company, of which I will be a shareholder in future.
But if it is offer for sale, I will think about it because the money is going into somebody’s pocket. Of course, that person or the fund or the private equity investor has taken a risk by investing in the company and at some point of time, has supported the company financially and otherwise to bring it to this stage where I am comfortable subscribing.
Having said that, for the reasons that we discussed earlier and because the company has been well in time to catch the electrification trend and the fact that it already has very high quality financial numbers in terms of EBITDA margins, in terms of return ratios, in terms of capital structure, debt equity, cash flows and things like that. Also the market is at a stage where money is continuing to come and is looking in for opportunities.
That is where, despite expensive valuations; a)The issue will get subscribed; b)My view is also to subscribe to it. There may be some listing gains even if not it does not matter, electrification is a trend which is catching up and any new money coming in and also the market cap. The issue itself is around Rs 5,500-crore-odd and the market cap at the upper end of the offer price will be about Rs 15,000-16,000 crore. Such size issues usually not available for institutional investors to subscribe in a bigger way.
