Modi 3.0: Can auto stocks deliver PSU stocks like returns in long term?

Modi 3.0: After the allocation of portfolios in the Modi cabinet, the Indian stock market has been on a bull trend as most of the frontline indices are either touching new highs or fast approaching record-high levels. According to stock market experts, the Indian stock market is heading for the next leg of a bull trend, and it is expected to begin after the presentation of the Union Budget 2024. They said that the majority of the crucial ministers relating to the business and economy of India have been retained, which augurs the continuity of the policies implemented or adopted in Modi 2.0. They predicted a rise in the private Capex formation, which may lead to a robust Indian economy. So, PSU banks and auto segments are expected to outperform others as these segments directly connect with the national economy.

PSU vs auto stocks: Which is better?

Reiterating the strong performance of PSU stocks in Modi 2.0, Saurabh Jain, Vice President — Research at SMC Global Securities, stated, "During Modi 2.0, the Government of India (GoI) was the primary driver of Capex formation, which sparked significant interest in PSU stocks. This success story of PSU stocks in the past should reassure investors about their potential in the future. This was in contrast to the private sector, where such Capex formation was not as evident. The market's expectation of Capex formation from the private sector was based on the projected growth of the national economy, which was on track due to the retention of most ministers in the same ministries."

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In a strong economy, private sector capital formation gains momentum, leading to increased purchasing power and per capita income. However, it's important to note that the market is likely to wait for the Union Budget 2024 for more clarity on government policies. The Union Budget, presented annually by the Finance Minister, outlines the government's revenue and expenditure plans for the upcoming fiscal year. This event is closely watched by investors as it can have a significant impact on the stock market. We anticipate some consolidation in auto sales by then, which could benefit auto stocks as their working capital and intrinsic value would be at an ideal level.

Lowering auto sales can have a positive impact on the Indian economy. When auto sales decrease, it often leads to a decrease in inflation, which is the rate at which the general level of prices for goods and services is rising. Lower inflation can prompt the Reserve Bank of India (RBI) to reduce interest rates. In a lower interest rate environment, auto sales are expected to increase due to a rise in demand following the reduction in bank rates. This potential cycle of events can have implications for the performance of auto stocks in the stock market.

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Experts said private capital formation is expected to boost auto and PSU bank stocks. However, they maintained that PSU stocks have already rallied a lot, so there is a chance of a rally in auto stocks.

Auto stocks to buy today

When asked about the potential of auto stocks, Saurabh Jain of SMC Global Securities suggested, "High-end auto companies are likely to see increased demand on Dalal Street, given the expansion of the SUV market from 15 percent to 40 percent in recent years. Therefore, it's worth considering auto ancillary stocks as well, as these companies serve as vendors to these large auto companies. Stocks such as Mahindra & Mahindra (M&M), Fiem Auto, and Lumax Auto could be promising choices for long-term investors."

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Sandeep Pandey of Basav Capital advised investors to consider the long-term prospects of specific auto stocks. For instance, he suggested looking into the future growth potential of Hero MotoCorp, Maruti Suzuki, and Baja Auto shares. By considering factors such as the companies' financial performance, market position, and industry trends, investors can make more informed decisions about their investments.

Disclaimer: The views and recommendations above are those of individual analysts, experts, and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.