The start of the June 2020 expiry was on a positive note. The broader stock indices are up 0.84% at 16,306 and they offer a gain of 0.8% at 54,692 at 10:00 am IST. All 11 sector indices are trading in the green zone, with the index advancing 0.9% to 11,196.5.
The Nifty Auto Index has gained over 5.7% in the past 6 sessions alone. The majority of the contribution came from the highest weighted shares of Maruti Suzuki (NS:) (with a weight of 20.4%), while Mahindra & Mahindra (NS:) (with a weight of 16.35%) also contributed to the rise of the Nifty Automatic Indexing.
Auto stocks have gained ground in recent sessions, primarily for two reasons. The first was a notable reduction in excise duty on fuel, making petrol cheaper by INR 8 per liter and diesel by INR 6 per litre. As the price has soared in international markets, currently trading at over US$114 a barrel, a fuel tax relief from the center has brought much-needed relief to the auto sector.
Generally speaking, fuel prices indirectly affect the trend of car/motorcycle sales as they tend to influence the consumption behavior of consumers. The higher cost of transport due to rising fuel prices forces the end consumer to look for alternatives to using private vehicles, which delays plans for new purchases of cars or motorcycles.
The second and probably the most compelling reason for the recent flow of money into auto stocks is the government’s decision to increase export duties on steel and iron ore intermediaries by 15% and 50% respectively. . The result of which is an increase in the supply of these essential raw materials in the domestic market, benefiting all manufacturing companies and automotive players are no different.
The auto industry had already been reeling under the pressure of rising raw material costs, due to soaring inflation amid the war between Ukraine and Russia. The government’s decision to limit exports of steel and iron would directly benefit the automotive industry with their increased availability and at a lower price.
Steel is a major component used in the automotive industry, with giants such as Maruti Suzuki having approximately 50% exposure to this product. Another perspective to look at the importance of steel in the automotive industry is that almost three quarters of a car’s raw materials are steel and its intermediates such as high carbon steel, stainless steel, galvanized steel, etc.
Clearly, both of these measures would alleviate the cost of transportation for end consumers and reduce the cost structure for automakers, which could potentially lead to an increase in demand for cars and motorcycles.