Cars Versus Commercial Trucks: Two Distinct Profit Engines
Not all automobile businesses behave alike, and understanding the difference can sharpen your investment decisions considerably. A reader who watches the Tata Motors share price is really following a company with exposure to both passenger and commercial segments. Someone focused on the Maruti share price is following a business built almost entirely around passenger cars. These two profiles respond to very different economic forces, which is why comparing them requires more than looking at a stock chart.
Two Different Customers
A family buying a hatchback or a compact utility vehicle is making an emotional and a financial decision based on the family’s income, ease of loan, fuel cost and dreams. A transporter buying a heavy truck, on the other hand, is making a calculating business decision based on freight availability, earnings per trip, loan cost and the payback period of the vehicle.
This distinction helps gauge timelines. The passenger vehicle demand is relatively steady as there exists a huge middle class and frequent model launches, whereas commercial vehicle demand follows long and deep cycles, as the buyers tend to buy greedily during upswings and hold back during downswings. Savvy investors understand this dichotomy and know why the demand in one segment would boom when the other is in doldrums and why the earnings from a multi-segment manufacturer would fluctuate quarter on quarter.
Commercial Vehicles and Infrastructure Spending
Trucks and buses are dependent on the health of the Indian economy. Highway construction, mining activity, cement consumption, agricultural produce, e-commerce growth and overall manufacturing activity are a few factors that boost the demand for commercial vehicles. Every time the government opens its wallet for infrastructure development, demand for tippers, hauliers and multi-axle trucks witnesses a spike. Similarly, any improvement in industrial production is a positive indicator for medium and light commercial vehicles.
Moreover, any change in regulations around axle load norms, vehicle scrapping, emission norms and safety features leads to a change in demand as the operators plan their fleet renewal. Fleet operators are becoming conscious of the total cost of ownership which includes fuel efficiency, maintenance, downtime, and spares availability. Manufacturers offering connected vehicles and ease of maintenance enjoy an advantage over competitors. As an investor, keep track of freight rates, capacity utilisation, bus orders from state road transport corporations or any government announcements in this space.
Passenger Cars and Household Sentiment
The passenger vehicle segment is a barometer for the consumer sentiment in the country. With rising disposable income, availability of easy credit, aspirational shift towards safer and feature-rich cars and increase in first-time buyers have led to a healthy demand for cars in the country. The demand in recent times has skewed towards utility vehicles and manufacturers are quickly expanding their product portfolio to meet this demand.
As the buyer shifts towards segment-specific SUVs, safety features, fuel economy, infotainment, and interior space are some important deciding factors. Availability of compressed natural gas, hybrid options, and electric vehicles add to the complexity and variety of buyer’s options. A strong dealer network that offers ease of purchase and serviceability even in smaller towns gives an edge to manufacturers over competitors. As an investor, apart from tracking the overall volumes and market share of different players, it is important to observe the used car market as the resale value significantly impacts the initial purchase decision.
Balancing Exposure in a Portfolio
As discussed earlier, the ebb and flow of demand in both segments follow a different pattern. Therefore, a balanced portfolio will include some exposure to both commercial and passenger vehicles. However, the exposure to commercial vehicles is risky as the segment has a long gestation period. Moreover, even though the demand in passenger cars is steady, there are no stocks that have a constant demand. A dip in freight rates or a slowdown in overall industry activity is bound to impact the commercial vehicle demand and in turn, the earnings of manufacturers. A similar dip in disposable income or consumer sentiment will impact the demand for passenger vehicles.
Therefore, while allocating a portion of the portfolio to automobiles, keep in mind the overall exposure to cyclical sectors like banking, metal and infrastructure. Having said that, it is always a good idea to diversify across industries while investing systematically to average out the entry price. Quarterly reviews of the portfolio to assess the returns on capital employed and track leverage and cash flows are important too.
Most importantly, remember that there isn’t a magic formula for tracking these stocks. A sharp investor combines his/her understanding of the sector with financial fundamentals and discipline. For any further queries, consult a SEBI-registered adviser.
