capital market theme: Premiumisation story may have peaked out in auto; bet on capital market theme: Dhananjay Sinha

A lot of time has passed since the slowdown in the monthly sales data for Motown got translated. We all know about the EV strategy, the global exposure, which most of these PVs have. Where is the merit in buying afresh or adding to the existing positions within the passenger vehicle makers because the market has given a clear verdict wherein M&M is taking the top slot and Tata Motors is pretty much out of favour.
Dhananjay Sinha: What we have seen in the passenger vehicle segment is that over the last three or four years, there has been a significant premiumisation driven margin expansion. The EBITDA margins for several passenger vehicle companies are at an all-time high or near all-time highs. Some shrinkage has happened, but they are near all-time highs.

Going forward, why some of these names are losing interest is because the premiumisation story may have peaked out. Multiple expansion was happening in the auto sector because of the higher average price of the vehicles sold, the expansion resulting from the 150-200% increase in the average sales price as people moved from the entry level cars to the SUVs. There was a huge amount of inflow of credit and the loan to value ratio is also rising.

So, multiple things are adding on in terms of the margin expansion and the operating leverage is peaking out. The average selling price for the premium vehicles might come off because in the urban sector, there has been a slackening in terms of the overall salary growth. The compensation and salary of the non-finance companies has come down to about 2% or 3%. So, there is a considerable amount of slowdown there and the credit side could also tighten. Hence the premiumisation part might actually take a hit, especially for companies such as M&M, which has got very high-end vehicles.

Of course the tractor component is attractive, but the SUV part may actually see some slackening. Hyundai Motors for instance has a very high premium segment. I would say Maruti is somewhat better because it still has about 60% market share in the entry level cars. The stock has not done much in terms of performance. I think that stock looks to be better. The other aspect to really look at is the reduction in the steel prices and we have seen margin expansion happening from the cost side in the third quarter results as well. It could pan out as we go forward.

Maruti definitely looks better relative to other passenger vehicles. And of course, I like two- wheelers because of the sort of income tax rebate that has been given, some leverage can happen there because of that and also next year, we will have a Pay Commission, which can add the demands of the government employees. So, over there also, there is something like Bajaj Auto or Maruti, TVS, which all can do better. I am closely looking at the premiumisation story, the cost aspect, the leverage aspect, and the income effects that can happen from the tax break and also the Pay Commission effect that would come next year.Do you think the entire capital market theme which has worked very well the past two years, will continue to do so after this recent bout of correction in equities?
Dhananjay Sinha: This is a structural story. A correction might have been there, but the whole market-oriented stocks are doing reasonably well with higher financialization and retail participation. So, there might be bouts of the market going up and down, but by and large, the participation of the financialization of retail investors in the market can continue. That is a structural story that I would bet on.