Automobiles as a theme will continue to do well due to under penetration across vehicle categories

What is your outlook on Indian equities from 3 to 5 year investment horizon?

We expect Indian Equities to do well over the coming 3-5 years as we see an uptrend in economic activity which should result in pick up in earnings and hence market returns. However, one needs to keep in mind that for many companies, valuations are high and hence investors would need to temper their return expectations.

You are launching SBI Automotive Opportunities Fund, a thematic fund which will invest primarily in the automobiles and auto ancillaries sectors. Though auto stocks are doing well now, they had underperformed for a fairly long period of time. Was the underperformance purely due to cyclical factors? Now that we have seen a reversal in fortune for these stocks, are there any structural factors that can lead to long term outperformance of the auto sector versus the broad market?

Yes, one can attribute the underperformance to cyclical factors along with a hyper inflation phase during which vehicle costs increased driven by an increase in insurance cost (2018) followed by India, on regulation front moving from BS4 to BS6 (2020). Along with that, COVID also impacted growth in the automobile space and hence there was an extended period of underperformance.

In the last couple of years, with a pickup in sales across vehicle categories, there has been a reversal in fortunes but we believe that in the medium to long term, automobiles as a theme will continue to do well due to under penetration across vehicle categories (aiding volume growth) and increasing premiumization (driving value growth) as affordability keeps improving.

The Chinese EV industry is growing at a rapid pace. What are your thoughts on the growth of China’s EV industry on the global automobiles industry? What are the opportunities and threats for our industry? Please share your thoughts?

The growth of Chinese EV industry will compel other global automakers to offer EVs at a competitive cost. Chinese EV makers are trying to make inroads in the Indian EV industry also by way of JVs which can accelerate EV adoption in India. Further India can be used as a manufacturing base for these JVs to export to other countries; especially at a time when a Developed economy has increased tax on Chinese imported Electric cars and there is growing threat of others following suit.

Growing global market share of Chinese EV OEMs means legacy OEMs could potentially lose share and hence ancillaries supplying to these legacy OEMs can also lose market share. However, many Chinese OEMs are now planning to set up manufacturing facilities in Mexico and Europe to circumvent the threat of tariffs. In that scenario, with an already existing ecosystem in place, Indian auto players have a better probability to win orders from these facilities and hence offset some bit of this threat.

Auto stocks have rallied with Nifty Auto Index growing at a CAGR of over 40% over the last 2 years or so. What are your thoughts on valuations of auto stocks?

While Auto stocks and the Nifty Auto Index has done well over the last two years, the valuations for Nifty Auto are at par with its historical averages. Also, the premium of Nifty Auto over Nifty today, is at historical range thereby making us believe that valuations are neither cheap nor demanding at the same point in time.

Interestingly, Nifty Auto has been a wealth compounder delivering 18% cagr returns over the last two decades (its listing history) and looking at the future growth prospects for the Automobile theme, we feel confident on the space from a medium to long term perspective.

What will be your stock selection criteria for SBI Automotive Opportunities Fund?

Our stock selection criteria would involve a two pronged portfolio construction strategy. Looking at the growth cycles in the automotive segment and the penetrations levels, we will have a top down approach for sub segment selection. Within the subsegments, the fund will have a bottom up stock selection strategy across both auto and auto ancillary names.

The stock selection parameters would be a) Companies’ growth potential b) Brand building capabilities c) ability to adapt to evolving auto landscape d) companies’ earnings quality and cash flows e) capital allocation strategy and return profile.

SBI Automotive Opportunities Fund NFO opened for subscription on 17th May 2024 and will close on 31st May 2024. What is your guidance for investors who want to get exposure in the auto sector through this fund? What should the minimum investment tenure for this fund? Please add your closing comments (if any)?

Auto is a structural long term growth story with pockets of opportunities emerging in various subsegments across various time frames. To adequately capture the growth cycles across various vehicle categories, we believe the minimum investment horizon for an investor in this fund should be 3-5 years.

Closing Comments

In Summary, The Automobile Theme is an excellent proxy to play the India manufacturing story and taking into account the under-penetration across categories, there is ample runway for growth across subsegments. The key levers that we find for growth to continue being good are a) low vehicle penetration which should be supported by the rising per capita income b) growing people aspiration as they upgrade their vehicle leading to more premiumization c) the broad scope that auto ancillaries have to offer where there are a host of subsegments and companies d) the underlying exports opportunity that the sector has to offer e) The wave of Electrification where there are certain champions ahead in the race whereby we can play the disruption in India but more importantly the Export opportunity that it has to offer and f) Government support through drives like Infrastructure push, FAME subsidies, PLI schemes etc leading to more import substitution opportunities, higher EV adoption and growth in the various subsegments.

Mutual Fund Investments are subject to market risk, read all scheme related documents carefully