Nifty Auto Index

A Drive through the Auto Sector of India

Can you take a wild guess of the number of vehicles on the road in India? 1 crore, 5 crore, 10 crore, 20 crore. Nope. You’re still mistaken. The total number of vehicles in India stood at 32.6 crores, and that’s in  2022, which is undoubtedly a lot less than now, considering the increase in the GDP. The Indian auto industry has grown at a 12.7% CAGR YoY and is expected to reach USD 512 billion by 2026. Now, you might be compelled to know which of the top companies in this sector are the best and wish to buy each of their stocks to gain that extra alpha to your portfolio. But what if I told you that you could buy a share in the whole sector instead of purchasing each of the company’s shares individually? This can be done by buying the Nifty Auto Index.

What is the Nifty Auto Index?

An index is a benchmark composed of many stocks for a specific purpose. It can be considered an imaginary stock (which can’t be traded) consisting of various individual companies, each with a particular weightage to track all the companies in one go. There are many indices on the NSE and the BSE, such as the Nifty 50 ( The benchmark of the Indian stock market), Sensex ( Similar to Nifty but by the BSE), Banknifty (Tracking the Indian banks) and several other sector-based, goal-based indices. The Nifty Auto Index tracks India’s automobile sector. The Nifty Auto Index is designed to reflect the behaviour and performance of the automobile segment of the financial market. The Nifty Auto Index comprises 15 tradable, exchange-listed companies. The index represents auto-related sectors like Automobiles, 4-wheelers, 2 & 3-wheelers, Auto Ancillaries and Tires.

Nifty Auto Index can be used for various purposes, such as benchmarking fund portfolios and launching index funds, ETFs, and structured products. This index is crucial for you as an investor if you want to rotate your capital among different sectors or even if you are a buy-and-hold type of investor. The following paragraph covers the method of how the index is calculated, but you can skip it if it is not of interest to you.

Calculation of the Index

The Nifty Auto Index is calculated using the free-float market capitalisation method. This means the index reflects the total free-float market value of all the stocks included in the index relative to a specific base market capitalisation value. Free-float market capitalisation refers to the market value of the readily available shares for trading in the open market. Each constituent company’s weightage in the index is determined by its free-float market capitalisation, with larger companies having a higher weightage. However, to ensure diversification and limit the influence of any single company, there are caps on individual stock weightage (33%) and the cumulative weightage of the top three stocks (62%). The index is rebalanced periodically to reflect changes in the constituent companies’ market capitalisation and maintain its relevance as a benchmark for the Indian automobile sector.

Constituents

The automobile industry has a well-defined value chain encompassing various stages, from raw material sourcing to the final sale and after-sales services. The value chain typically includes:

1. Raw Material Suppliers: Companies that supply raw materials like steel, aluminium, rubber, and plastics to component manufacturers.
2. Component Manufacturers: Companies that produce components like engines, transmissions, brakes, tyres, and electronics.
3. Original Equipment Manufacturers (OEMs): Companies that assemble vehicles using components from various suppliers.
4. Dealers and Distributors: Companies that sell vehicles to consumers through dealerships and distribution networks.
5. After-Sales Service Providers: Companies that provide vehicle owners maintenance, repair, and other services.

The Nifty Auto Index primarily covers companies that fall under the OEM category. These are the major players in the Indian automobile market, such as Maruti Suzuki, Tata Motors, Mahindra & Mahindra, Bajaj Auto, and Hero MotoCorp. The index includes a few component manufacturers like Bharat Forge and Motherson Sumi Systems.

However, the index doesn’t directly include companies from other value chain stages, like raw material suppliers or after-sales service providers. This is because the index is designed to represent the performance of the automobile manufacturing sector rather than the entire value chain.

Nonetheless, the performance of the Nifty Auto Index is indirectly influenced by the companies in other stages of the value chain. For example, fluctuations in raw material prices can impact the production costs and profitability of OEMs, affecting the index. Similarly, the efficiency and effectiveness of dealers and distributors can influence sales volumes and contribute to the index’s overall performance.

This is the list of stocks, along with their weightage in the Nifty Auto Index ( According to the closing of June 2024)

Constituents of Nifty Auto Index

The weightage of stocks can change depending upon the capitalisation of the company. The current weightage of each of the stocks can be checked by going to the official website of NSE:

https://www.niftyindices.com/indices/equity/sectoral-indices/nifty-auto

Growth Trends

Nifty Auto has delivered a CAGR of 17.55% since its base date and 15.74% since its launch date. The index’s performance has been exceptional since the pandemic and has given a return of 476% since the bottom of March 2020.

The chart of the Nifty Auto Index reveals several significant trends and turning points since 2011:

1. Early Growth Phase (2011-2015): The index experienced a significant upward trajectory from its inception in 2011 until 2015. This can be attributed to several factors:

• Economic Growth: India’s economy was experiencing robust growth, leading to increased consumer spending and automobile demand.
• Rising Disposable Incomes: The expanding middle class had more disposable income to spend on personal vehicles.
• Favorable Government Policies: Government initiatives like infrastructure development and easier credit access boosted the auto sector.

2. Consolidation Phase (2015-2019): The index entered a period of consolidation from 2015 to 2019, with the growth rate slowing down and the index experiencing some fluctuations. Several factors contributed to this:

• Economic Slowdown: India’s economic growth rate moderated during this period, impacting consumer sentiment and automobile demand.
• Regulatory Changes: Stricter emission norms and safety regulations increased production costs for automakers.
• Rising Fuel Prices: Fluctuating fuel prices affected the affordability of vehicles, particularly those with internal combustion engines.

3. Recovery and Growth Phase (2019-Present): The Nifty Auto Index started recovering in 2019 and has since experienced a strong upward trend. This can be attributed to:

• Government Stimulus: The government introduced various measures to stimulate the economy, including tax cuts and incentives for the auto sector.
• Pent-up Demand: The COVID-19 pandemic led to a temporary slowdown in 2020, but pent-up demand for personal mobility fueled a sharp recovery in 2021 and beyond.
• Shift Towards Electric Vehicles (EVs): The growing interest in EVs and government support for their adoption have presented new growth opportunities for the industry.
• Rural Demand: Rural incomes and improved infrastructure have increased vehicle demand in rural areas.

Rolling Returns

If you don’t know what rolling returns are, let me explain them. Rolling returns are the continuous returns of a stock or an index for a specific period. For example, in case of 1-year rolling returns, we would calculate the returns of Nifty Auto from 01/01/2023-01/01/2024,02/01/2023-02/01/2024, and so on for each day of the year.

These are the rolling returns of Nifty Auto over different periods:

Performance against Nifty 50

Here, we can see that Nifty Auto has fared pretty well compared to its peers (the other indices).

Sectoral trends within the Auto index:

• Passenger Vehicles (PV): The PV segment has experienced a robust recovery post-pandemic, driven by pent-up demand, new model launches, and a gradual shift towards personal mobility. However, rising fuel prices and chip shortages have impacted production and sales growth.
• Commercial Vehicles (CV): The CV segment has gradually recovered, supported by increased infrastructure spending and e-commerce growth. However, high operating costs and financing constraints have hindered a faster rebound.
• Two-Wheelers (2W): The 2W segment, the largest in terms of volumes, has faced challenges due to rising input costs, rural distress, and regulatory changes like the transition to BS-VI emission norms. Nonetheless, demand for electric two-wheelers is emerging as a bright spot.

Company-Specific Analysis

• Maruti Suzuki: As the most significant player in the Indian PV market, Maruti Suzuki’s performance significantly influences the Nifty Auto index. Recent challenges like chip shortages and increased competition have impacted its sales volumes, leading to some volatility in the index.
• Tata Motors: Tata Motors, with its diverse portfolio of passenger and commercial vehicles, has shown resilience, driven by strong demand for its SUVs and electric cars. Its performance has positively contributed to the index’s movement.
• Mahindra & Mahindra: Mahindra & Mahindra’s strong presence in the CV and tractor segments has stabilised its performance. The company’s focus on electric mobility and farm equipment will drive future growth.
• Bajaj Auto: Bajaj Auto, a significant player in the 2W segment, has faced headwinds due to market challenges. However, its focus on exports and premium motorcycles offers potential for recovery.
• Eicher Motors: Eicher Motors, known for its Royal Enfield motorcycles, has maintained a premium positioning and enjoys a loyal customer base. Its performance remains relatively stable, contributing positively to the index.

The Nifty Auto index reflects a dynamic mix of challenges and opportunities across different segments and companies. While the industry navigates through short-term headwinds, the long-term growth potential remains strong, driven by increasing urbanisation, rising disposable incomes, and the ongoing shift towards electric mobility.

Macroeconomic factors (Risks and Opportunities to consider before investing)

• Economic Growth: India’s GDP growth rate will be around 6-7% in the coming years. This sustained growth can boost consumer confidence and disposable income, increasing demand for automobiles, especially in the rural and semi-urban markets. Also, as disposable incomes rise, automobiles will soon gain a share of the revenue, as buying a vehicle can be considered a dream in many Indian households.
• Interest Rates: The Reserve Bank of India (RBI) is expected to maintain a cautious approach towards interest rates in the near future to manage inflation. Any significant rate hikes could impact vehicle financing and dampen demand, particularly for commercial vehicles.
• Inflation: While inflation has been a concern, the RBI’s measures and easing global commodity prices may help stabilise it. However, any unexpected surge in inflation, especially in fuel prices, could impact the affordability of vehicles and affect the index.
• Government Policies: The government’s focus on infrastructure development, including road and highway construction, is a positive sign for the auto sector. Additionally, the Production Linked Incentive (PLI) scheme for the auto sector aims to boost domestic manufacturing and exports, which could benefit the index in the long run.
• Commodity Prices: While commodity prices have eased recently, any volatility in key inputs like steel, aluminium, and crude oil could impact production costs and profitability margins for automakers.
• Exchange Rates: The rupee’s stability against the US dollar is crucial for the auto industry. A depreciating rupee could increase the cost of imported components and affect the profitability of companies with high import content.

Current Events:

• Global Chip Shortage: While the chip shortage shows signs of easing, it still risks production schedules and vehicle availability. Any further disruptions in the semiconductor supply chain could impact the index negatively.
• Rising EV Adoption: The growing adoption of electric vehicles in India, driven by government incentives and increasing consumer awareness, is a significant trend. Companies investing in EV technology and infrastructure will likely benefit, while traditional automakers may face challenges adapting to this shift.
• Monsoon Season: The performance of the monsoon season significantly impacts rural demand for vehicles, especially tractors and two-wheelers. A good monsoon season can boost agricultural income and drive demand in rural areas, positively affecting the index.
• Regulatory Changes: The government is expected to introduce stricter emission norms and safety regulations in the coming years. This could increase production costs for automakers and impact their profitability in the short term. However, it could also drive innovation and long-term sustainability in the sector.

By closely monitoring these specific macroeconomic factors and current events, you can gain valuable insights into the potential direction of the Nifty Auto Index and make informed investment decisions.

Risks of investing in the Auto Index

Investing in the Nifty Auto index, like any investment, carries certain risks that you as an investor should be aware of:

1. Sector-Specific Risks:
   • Cyclical Nature: The automobile industry is cyclical, meaning its performance is closely tied to the overall economic conditions. During economic downturns, vehicle consumer demand can decline significantly, impacting the index’s value. Also, the index has already given a massive run-up in 2022-2023, so many experts believe that the index may consolidate over the next few months.
   • Regulatory Changes: Government regulations related to emissions, safety standards, and taxation can impact the profitability and growth prospects of automobile companies, leading to volatility in the index.
   • Technological Disruptions: Rapid advancements in electric vehicles (EVs) and autonomous driving technology pose opportunities and challenges for traditional automakers. The transition to EVs could disrupt the established players and create uncertainty in the sector.
2. Market Volatility:
   • Economic Factors: Changes in interest rates, inflation, and fuel prices can significantly affect consumer sentiment and purchasing power, leading to fluctuations in automobile demand and the index’s performance.
   • Global Events: Geopolitical tensions, supply chain disruptions, and fluctuations in global commodity prices can impact the automobile industry’s production costs and sales, causing volatility in the index. The Russia-Ukraine war, The Hamas war and other such events are proof of the increase in the frequency of such global events.
3. Company-Specific Risks:
   • Financial Performance: The individual companies constituting the index can face challenges related to their financial health, operational efficiency, and competitive position. Any negative news or events related to these companies can affect the overall index.
4. Concentration Risk:
   • Limited Diversification: Investing solely in the Nifty Auto index means your investment is concentrated in a single sector. This lack of diversification can expose you to higher risks than investing in a broader market index.
5. Tracking Error:
   • Index Replication: Exchange-traded funds (ETFs) or index funds tracking the Nifty Auto index may not perfectly replicate its performance due to tracking errors caused by expense ratios and trading costs.

Risk Mitigation Strategies:

While these risks are inherent to investing in the Nifty Auto index, investors can employ specific strategies to manage them:

• Diversification: To reduce your overall risk exposure, consider diversifying your portfolio by investing in other asset classes or sectors.
• Research: Conduct thorough research on the automobile industry, its trends, and the individual companies within the index to make informed investment decisions.
• Long-Term Perspective: Adopt a long-term investment horizon to reduce short-term market fluctuations and benefit from the sector’s potential growth.
• Professional Advice: Seek guidance from a financial advisor who can help assess your risk tolerance and create a suitable investment plan.

Remember, investing in any financial instrument involves risks. Understanding these risks, assessing your risk tolerance, and investing wisely based on your financial goals and circumstances is crucial.

How to invest in the Nifty Auto Index?

• Nippon India Nifty Auto ETF: This exchange-traded fund (ETF) tracks the Nifty Auto index, aiming to replicate its performance. It offers investors a convenient way to gain exposure to the Indian automobile sector through a single investment.
  • Expense Ratio: 0.22%
  • Fund Size:₹206.22 Cr
• Tata Nifty Auto Index Fund: This index fund also seeks to replicate the performance of the Nifty Auto index. It is a passive investment option, suitable for investors looking for a low-cost way to invest in the automobile sector.
  • Expense ratio:0.34%
  • Fund size:₹66.64 Cr
• ICICI Prudential Nifty Auto Index Fund: This index fund also seeks to replicate the performance of the Nifty Auto index. It is a passive investment option, suitable for investors looking for a low-cost way to invest in the automobile sector.
  • Expense ratio: 0.42%
  • Fund Size: ₹135.5 Cr

All of these options provide diversified exposure to the Nifty Auto index, allowing investors to participate in the growth potential of the Indian automobile industry without having to select individual stocks. However, it’s important to note that investing in these funds carries the same risks associated with the Nifty Auto index, such as sector-specific and market volatility.

Before investing in either of these funds, conducting thorough research, understanding the associated risks, and considering your investment goals and risk tolerance is essential.

Events in the past that impacted the index

Impact of BS-VI Emission Norms Implementation (2020)

• Background: In April 2020, India implemented the stricter BS-VI emission norms, requiring significant technological upgrades for automobile manufacturers. This led to increased production costs and a temporary slowdown in sales as companies adjusted to the new standards.
• Impact on Nifty Auto: The Nifty Auto index experienced volatility during this period, with a temporary decline in value as investors factored in the increased costs and potential sales impact. However, the index recovered as companies successfully transitioned to BS-VI-compliant vehicles, and consumer demand gradually increased.
• Key Takeaway: This case study demonstrates the impact of regulatory changes on the automobile sector and the index’s ability to adapt to such transitions.

COVID-19 Pandemic Disruption and Recovery (2020-2021)

• Background: The COVID-19 pandemic led to lockdowns and supply chain disruptions, severely impacting automobile production and sales. Consumer sentiment also took a hit due to economic uncertainties.
• Impact on Nifty Auto: The Nifty Auto index suffered a significant decline during the initial months of the pandemic. However, as lockdowns eased and economic activity resumed, the index recovered steadily, driven by pent-up demand and government stimulus measures.
• Key Takeaway: This case study highlights the resilience of the Indian automobile industry and the Nifty Auto index’s ability to rebound from significant disruptions.

Maruti Suzuki’s Dominance and Recent Challenges (Ongoing)

• Background: Maruti Suzuki, India’s largest car manufacturer, has traditionally been a dominant player in the Nifty Auto index, with a significant weight. However, the company has faced challenges recently, including increased competition, changing consumer preferences, and chip shortages.
• Impact on Nifty Auto: Maruti Suzuki’s performance substantially influences the Nifty Auto index. Any fluctuations in the company’s stock price or market share can significantly impact the index’s overall movement.
• Key Takeaway: This case study demonstrates the importance of individual company performance within the index and the potential risks associated with over-reliance on a single company.

Conclusion

In conclusion, the Nifty Auto index paints a dynamic picture of the Indian automobile industry, reflecting challenges and opportunities across various segments. While short-term headwinds like chip shortages and rising input costs persist, the long-term outlook remains positive, fueled by increasing demand, government initiatives, and the transition towards electric mobility. Companies like Tata Motors and Mahindra & Mahindra are well-positioned for growth, while others like Maruti Suzuki and Bajaj Auto navigate a changing landscape. For investors, the Nifty Auto index presents a compelling avenue to participate in India’s automotive growth story. Still, a thorough understanding of sectoral trends and company-specific factors is crucial for informed decision-making.