Are you hunting high and low for the best auto stocks to buy in India? But you find yourself at sea when it’s time to figure out which are the top auto stocks in India.
To help you out, this blog post features the automobile sector stocks you should buy that will deliver robust returns when you stay invested in the long run.
The importance of the Automobile Sector
It’s an open secret that India is one of the biggest markets in terms of commercial vehicles or passenger vehicles both. The automobile sector counts 50% when you take account of manufacturing GDP in India, and 7.1% of the overall GDP. In terms of total tax collection, the share of the auto industry stands at 15% employing 32 million working population.
From the above stats, it’s as clear as the sky is blue that the auto sector has the potential to deliver the superior returns in the long run.
To find the best stock in auto sector, perform an upside-down fundamental analysis of stocks.
How to do fundamental analysis of automobile stocks in India?
When you are on a fishing expedition for the best auto stock for long term, check out the following 10 parameters before starting investment in a company.
Parameter #1. Debt to Equity Ratio
When the total liability of the company is divided by its shareholder equity, the result is the debt to equity ratio of the company. The shareholder equity can be calculated when you subtract the liabilities from the total assets of the company.
The debt to equity ratio gives a clear signal whether the company is financing its daily operations through its own funds or via debt financing. The debt to equity ratio reveals whether the shareholders’ equity will cover the outstanding debts in full by liquidating the assets that the company has when there’s a deep in the company’s sales and profit margin. Simply put, a company with higher debt to equity ratio means there is a higher risk.
There’s no ideal debt-to-equity ratio for all sectors or industries. The debt to equity ratio varies from sector to sector. For example, the banking sector has a higher D/E ratio when compared to other sectors. Meanwhile, a company with a debt-to-equity ratio of less than 1 is a sweet spot for the majority of the investors.
Parameter #2. Profit Margin
Profit margin helps a retail investor to figure out what percentage of sales in a quarter or in a financial year has been turned into profits by running a business. For example, if a company has achieved a 23% profit margin during a quarter or in a financial year, it’s as clear as the sky is blue that the company has a net income of 23 when the total sales stand at 100.
The profit margin indicates the efficiency of the management that works day in day out to generate higher profits. Alike the debt to equity ratio, the profit margin varies from sector to sector. For instance the technology, pharmaceuticals have a higher profit margin when compared to automobiles, or agriculture. As a good rule of thumb, invest in those companies where the net profit margin witnesses a two-digit growth during the last 10 years.
Parameter #3. Earnings per Share
When you divide the net profit made by a company in a financial year by the company’s total shares outstanding, you will find the earnings per share.
The earnings per share indicate how much profitable a corporation is. The higher the EPS is, the higher the price the investors will pay to own the company’s share once they find that the company’s current trading price is relatively lower when compared to the profits the company has made.
It’s a difficult call to deliver the ideal earnings per share since it reveals what the investors are willing to pay after analyzing the future earnings growth of the company when compared to its peer competitors in a specific industry or sector. By analyzing the earnings per share you calculate what amount of rupee the market is willing to pay for each rupee of earnings in a financial year and invest accordingly.
Parameter #4. Dividend Payout
When you are expecting a regular, steady income source by investing in a company, then it’s a good idea to invest in those stocks that historically have a good dividend payout record. The companies that are operating in the consumer durables, food and beverages, and utilities have historically given consistent dividends to cheer the shareholders. Before investing in any company, take a look back at its dividend payout, earnings, and cash flow. When a company has increased its profit year on year, then it’s highly likely that the company will declare dividends to its shareholders.
Parameter #5. Return on Equity
The return on equity showcases the financial performance of the company in a given financial year by analyzing what profit has been made by the company by utilizing the shareholder’s equity. When the net income of the company is divided by its shareholder’s equity, you will find the return on equity.
Alike other ratios the return on equity is not different.ROE is also varying from sector to sector. A company with ROE > 15% is a sweet spot for the majority of the shareholders. But don’t invest in a company solely because the company has delivered a satisfactory ROE. Take a close look at its debt obligations since the debt obligations impact an adverse effect in the long run.
Parameter #6. Return on Capital Employed
The lion’s share of analysts and retail investors use the ROCE to access the management’s efficiency to generate the profit from the available capital. The ROCE can be calculated once you divide the earnings before interest and tax by capital employed.
ROCE is one of the useful matrices to evaluate the management’s efficiency and financial performance of a company in capital-intensive sectors where the companies have a significant debt obligation. It’s interesting to watch what profit the company has made in a financial year when the total capital employed stands at 1. The higher the profit percentage is, the better the management is. It’s a good idea to invest in those companies in which ROCE is increasing year on year when compared to the companies where ROCE is fluctuating when both the companies are operating in the same sector or industry.
Parameter #7. Price to Sales Ratio
The price to sales ratio reveals what rupee the investors are willing to pay when its total sales stand at 1 in a financial year. The Price to Sales ratio can be calculated by dividing the current trading price of the company by its per-share sales in a financial year.
The lower the P/S ratio is the better the company is when compared to the peer companies. A company with a high P/S ratio, as compared to the industry average, indicates that the company is overvalued. When you have found a company that has P/S ratio below the industry’s average, then investigate the debt obligations of the company before investing. A company with a lower debt ratio and low P/S ratio has high possibility to deliver superior returns in the long run.
Parameter #8. Price to Earnings Ratio
To gauge the valuation of a company among its peer competitors, the price to earnings ratio is a handy matric. The price to earnings ratio reveals what time it will take to recover the initial investment an investor has made in a company through ongoing profits year on year. If the P/E of the company stands at 12, then it can be assumed that it will take 12 years to gain the initial investment.
The price to earnings ratio can be calculated once you divide the current share price of a company by its earnings per share in a financial year.
Alike the EPS, P/S ratio, the price-to-earnings ratio alters from one sector to sector. Do check the industry P/E at first, and then check whether the company’s P/E is below the industry average or not. If the company’s P/E is relatively higher then there’s a possibility that the investors expect robust performance in the remote future. On the flip side, if the industry’s P/E is relatively lower then it’s clear that the investors aren’t optimistic about the sector’s growth potential.
Parameter #9. Price to Book Ratio
To compute whether the company’s market capitalization is in line with its book value, the price to book ratio is a helpful metric. When you divide the company’s current market value by its book value per share, the result is the price to book ratio.
You can calculate the market value of the company by multiplying the share prices with the number of outstanding shares. The Book value per share gives a clear view of what you will get after clearing all the debts that the company has, in the scenario of a company goes bankrupt.
It’s hard to pinpoint the exact price to book ratio. However, a company with a P/B ratio of less than 1 is a lucrative investment opportunity. Meanwhile, value investors prefer investing in those companies where the P/B ratio stands between 1 and 2.
Parameter #10. Beta
When it’s time to gauge the volatility of a stock with respect to the overall market, Beta is a handy metric for investors. For instance, if the company’s beta stands at 1.25, then it’s as clear as the sky is blue that the stock will jump 125% when the market is surged 100%. On the flip side, if the market plummets 50% then the stock is likely to plummet 63%. A company with high beta tends to deliver superior returns in the long run if the company delivers robust earnings year on year.
- Read also: Ten golden rules of Dalal Street
7 Best Auto Stocks to Buy in India
You will find the 7 best auto stocks to buy in India after evaluating the above-mentioned factors including Market Capitalization, Sales growth, Profit growth, Return on Equity, and counting.
Undoubtedly, Maruti Suzuki is the largest manufacturer of passenger cars in India with a market share of 49%. No matter what is your priority be it SUVs or Sedans, you will find the best vehicle that will suit your needs. Vitara Brezza, Celerio, Ertiga, Baleno are the few famous brands of Maruti Suzuki. What gives the Maruti Suzuki a competitive advantage over its competitors is its number of showrooms across India and options across multiple price ranges.
Maruti Suzuki enjoys a debt-free status and in the post-pandemic world, the demand for the 4-wheeler is on the rise that in turn results in a spike of revenue and thereafter profit margin. For the financial year 2021, the total sales of the Maruti Suzuki is ₹70,372 crore. The market capitalization of the company stands at ₹2,28,903 Crore. The increasing disposable income in the post corona world will likely keep the demands on the rise and a strong distribution network will lend a helping hand in earnings growth.
Tata Motors is an Indian auto manufacturer that is engaged in the manufacturing of passenger cars, trucks, buses, and counting. This is the world’s 4th largest truck manufacturer and 2nd in terms of bus producer. Not only in India, but Tata Motors also has a global presence. Tata Motors has set up manufacturing plants in Asia [India, and Thailand], Africa [South Africa], Latin America [Argentina], Europe [United Kingdom]. Along with manufacturing units, Tata Motors has set up research and development centers across India, South Korea, Spain, and United Kingdom. Thanks to its vast distribution network across 26 countries, Tata Motors is a leading global player in the vehicle segment.
The total revenue of Tata Motors for the FY 2021 is a whopping ₹2,52,437 Crore. The total market capitalization of Tata Motors is ₹1,69,219 Crore. The company is successfully top up its assets which is ₹3,43,125, up 6.52% as compared to the last financial year.
Bajaj auto is an Indian automobile company that is engaged in the manufacturing of two-wheeler and three-wheeler vehicles. Bajaj Auto is the second largest 2-wheeler maker in the domestic market and the third-largest around the globe. In the segment of 3-wheeler, the company has retained its top position for the last few decades in the world. Through strategic partnerships with global players, Bajaj Auto is a global player in the space of the 2-wheeler segment. This means Bajaj Auto isn’t reliant on any specific product or a region.
What makes Bajaj Auto the most valuable two-wheeler maker company is that it crossed a market capitalization of ₹1 lakh crore back in December 2020. Bajaj Auto is a debt-free company with a total sale of ₹27,741 for the financial year ended in March 2021. What makes the shareholders happy is Bajaj Auto has delivered a whopping ROE of 27% for the past decade with a healthy dividend yield of 3.71%. Thanks to the good monsoon and recovery of the economy post corona pandemic, this company is the best bet in the auto sector that will yield the best returns in the long run.
Hero Motocorp is engaged in the manufacturing of Motorcycles and Scooters. Hero Motocorp has expanded its footsteps around 40 countries around the globe. This is the largest two-wheeler manufacturer not only in the domestic market i.e. India but also in the world. A large number of showrooms and service centers, a wide variety of scooters, and two-wheelers in the entry and deluxe segment have helped the company to retain its market share of 50%+ in the domestic two-wheeler segment. The presence of the company in the rural areas benefits the company thanks to good monsoon and recovery in earnings level in the rural areas.
Hero Motocorp is a debt-free company with a market cap of ₹54,231 Crore. When you are expecting a regular and steady income by investing then Hero MotoCorp is the best bet in the auto sector since its dividend yield is 3.32% with a healthy dividend payout of 57.26%. Plus, Hero MotoCorp’s ROE is 22.25% for the last 3 years.
This Indian multinational company is engaged in the development and production of Agri machinery, construction equipment for realty, and mining sectors, and railway equipment to lend a helping hand in the modernization of India which is the world’s fourth-largest railway network. Not only in India, but Escorts has also entered its footsteps around the globe and has a presence in 40+ countries.
The total sales of the Escorts is ₹7,014 crore for the financial year ended on March 2021. This is a debt-free company that delivered a 2-digit growth in sales and profit margin both during the past decade. The total market cap of Escorts is 21,054 Crore and a ROCE of 26.1% makes the company a lucrative investment opportunity.
This is an Indian automotive company that is engaged in the manufacturing of motorcycles and commercial vehicles. Back in 2008, Eicher Motors made the collaboration with Volvo Group, and since then it provides a wide range of trucks, buses, and counting. Thanks to its ‘Royal Enfield’ brand Eicher Motors has maintained a monopoly in the premium 350 and 500cc segment. Not only in the major cities across the country, Eicher Motors exports ‘Royal Enfield’ to over 60 countries around the globe including the USA, UK, Euro Zone, Middle East, and South-East Asia.
With a market capitalization of ₹74,819 Crore, Eicher Motors is a debt-free company. Where the majority of auto companies witness a downturn during the corona pandemic, Eicher Motors has improved the operating profit margin and elevated the sales steadily year on year despite the Covid-19 outbreak. During the financial year 2010-2020, the company witnessed a sales growth of 7%, and profit growth stands at 22%. Plus, Eicher Motors has given a whopping 24% ROE during the past 10 years.
TVS Motors is the Indian auto maker that is engaged in the development of motorcycles, mopeds, and 3-wheelers. The global presence across 60+ countries around the globe makes the TVS motors the second-largest 2-wheeler exporter in India. ‘Apache’, ‘Jupiter’, ‘Scooty’, ‘XL 100’, etc. are the few well-known brands of TVS Motors. Recently, TVS Motors has launched its first electric vehicle ‘iQUBE’ to stay in line for a greener environment.
The company has maintained a healthy two-digit sales growth, and profit growth. Plus, TVS Motors has maintained a healthy dividend payout of 26.07%. The market capitalization of the TVS motors is ₹35,332 Crore. The 52-week high and low of the security is ₹813.95 and ₹445.50.
Hope this article will help you to find the auto sector share in long term.
Have I missed any best auto stocks in India? Make a comment so that I can add it to this list ASAP.
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