March 2022 / Q4 FY22

01From Biscuits To Fuel: The War Is Driving Up The Price Of Almost Everything

The Russia–Ukraine conflict has cascaded across categories that touch every Indian household — from staples in the kitchen to fertiliser in the field to fuel in the tank. Russia is a major player in palladium and other industrial inputs, while Russia and Ukraine together produce a meaningful share of the world’s wheat, barley, and sunflower oil. The result is a synchronous spike across both food and fuel categories.

Steel prices have already moved up 10–15% in the last two months alone. The food, fuel, and metals shock is washing into corporate margins, and the next two quarters will test how quickly companies can pass through the increase.

02Amidst The Crisis, India Gets Ready To Supply The World

India’s March 2022 monthly merchandise exports were the highest ever — up 14% over March 2021 and 88% over March 2020. Free-trade agreements have been signed with the UAE and Australia, with the UK in advanced negotiation. Even tactical responses are sharper — the customs duty on imported cotton was removed within a week of an industry representation.

The supply-chain re-routing triggered by the war is already visible in agri exports. India’s agricultural exports for FY22 totalled USD 50.2 bn, +20% YoY — with sharp YoY moves in wheat, sugar, raw cotton, and marine products[4].

03Indian Auto Sector: Bumpy Ride To Stabilise Soon?

No sector embodies the contrarian set-up better than Indian Auto today. A decade of slowing growth, three sequential shocks (semis, raw materials, regulatory), and a market cap share that has reverted to its long-run average — that is the cocktail we are paying close attention to.

3ASector Gasping For Growth For Over A Decade

Auto sales growth slowed to roughly a third of the previous decade across every sub-segment — passenger vehicles, commercial vehicles, two-wheelers, and three-wheelers — comparing FY00–FY10 against FY10–FY20.

The year-by-year picture is even bleaker. Four of the last twelve years registered absolute declines in PV / 2W / CV volumes — FY13, FY14, FY20, and FY21 — set against a GDP that itself slowed sharply in FY20 and turned negative in FY21.

3BCurrent Headwinds

Three headwinds compound on the demand-side weakness. First, the semiconductor shortage continues to constrain production despite robust order books — and the war has made it worse, given that Ukraine produces more than 50% of the neon gas required for semiconductor manufacturing. Second, raw-material costs have exploded — Brent crude, aluminium, and steel all double-digit higher over the last 24 months. Third, regulatory transitions (BS-VI, mandatory safety features, the EV transition) have layered cost increases on top of a price-sensitive consumer.

These cost pressures, combined with regulatory mandates, have pushed on-road prices materially higher across both PV and 2W categories. Some flagships are 24–36% more expensive than they were just three years ago.

3CHow Long Before The Industry Accelerates?

Four tailwinds are quietly assembling beneath the noise. Together they argue that the worst is behind, even if the absolute volumes will not snap back overnight.

Revival of the rural economy. A normal monsoon, MSP support, and rising rural employment from PLI-led manufacturing are starting to show in tractor and 2W volumes.

Pent-up demand for PVs. As per ET, Maruti Suzuki is sitting on 270,000 pending bookings — more than twice the usual — and waiting periods on flagship SUVs have run into more than a year.

Used-car prices are also rising sharply — a leading indicator of pent-up demand. As per a CNBC TV18 article, used-car prices have risen 7–10% over 2020[8]. “The average selling price of a used car on OLX Auto is ₹4.84 lakh in January 2022 versus ₹3.99 lakh in January 2021 — a 21% jump,” notes Amit Kumar, CEO, OLX Auto[9]. Mahindra First Choice Wheels CEO Ashutosh Pandey has shared that Q4 used-car volumes equalled the full prior-year volumes — a 100% YoY growth[10].

Economic revival driving the capex cycle. Construction, mining, infrastructure, and manufacturing capex are all turning — which historically pulls CV and tractor volumes with them.

Export opportunity. Global OEMs are diversifying their supplier base. Case New Holland Industrial has stated an intent to triple parts sourcing from India to over USD 300 million in three years — and that is one mid-sized OEM in one segment. The runway here is multi-year.

3DIndustry At An Inflection Point

The Indian auto sector currently sits at ~5.5% of total market cap — back at its long-term average — versus historical peaks of 9–10% as the cycle turns. The shape of the chart over two decades is the cleanest case for mean-reversion that we have seen.

3EDiamonds In The Rough

A sector-level inflection does not buy you everything in the sector. Sub-segment profitability over the last three years tells the bottom-up story: trucks/LCVs, leather, bearings and diesel engines have seen savage PAT compression, while batteries and lubricants quietly compounded. Picking sides matters more than picking the moment.

We have walked the talk — having identified and invested in one such auto-ancillary company. The company is a market leader in its chosen category, has been around for nearly six decades, and counts Volvo, Tata Motors, BMW, and Mercedes Benz amongst its customers. It has expanded its product profile through organic moves and multiple JVs with foreign partners.

04In Closing

The combination of a top-quartile FY22 outcome, a structurally bruised auto sector at a long-term mean, and a portfolio company already compounding inside it is the closest thing to a contrarian set-up we have seen in some time. We continue to do the work bottom-up — and to use widespread fear, as the gentleman at the top of this letter put it, as a friend.

As always, please feel free to reach out to us with your comments, suggestions, and feedback.

Sources

01

NSE; Equitree Capital — Nifty Smallcap 100 TRI weekly closes, January to early April 2022. The “28% from high / 13% from bottom / 13% below pre-volatility high” statement is computed from the index path through the US Fed January meeting and the late-February Russian invasion of Ukraine.

02

Equitree Capital internal performance records as of 31st March 2022. Returns over one year are annualised; individual portfolio performance may differ. FY22 outperformance vs Nifty Small Cap 100: +7.38 pp.

03

Investing.com; Equitree Capital — agri commodity price changes (Sep’21–Apr’22) and industrial commodity price changes (May’20–Apr’22).

04

DGCIS via Financial Times — India agricultural exports, FY22. Total USD 50.2 bn, +20% YoY. Wheat +273%, Sugar +65%, Raw Cotton +48%, Marine Products +30%, Rice +9%, Buffalo Meat +4%.

05

Society of Indian Automobile Manufacturers (SIAM); auto OEM annual reports; Equitree Capital — auto sales-volume CAGR by segment, FY00–FY10 vs FY10–FY20; year-by-year volume growth across PV / 2W / CV vs India GDP, FY10–FY21.

06

Bikedekho; Cardekho; Equitree Capital — on-road price changes for representative passenger-vehicle and two-wheeler models, 2019 vs 2022.

07

Mint; Equitree Capital — passenger-vehicle waiting periods, March 2022 snapshot.

08

CNBC TV18 — used-car price increase of 7–10% over 2020. Article published in early 2022.

09

OLX Auto press statement — Amit Kumar, CEO, OLX Auto, on the rise in average used-car selling price from ₹3.99 lakh in January 2021 to ₹4.84 lakh in January 2022.

10

Mahindra First Choice Wheels press statement — Ashutosh Pandey, CEO & MD, on Q4 used-car volumes matching full prior-year volumes (100% YoY growth).

11

Ace Equity; Equitree Capital research — auto sub-segment financial performance, FY19 to TTM FY22 CAGR. Auto sector market cap as % of total market cap, March 2001 to March 2022.

12

Equitree Capital — investee auto-ancillary company internal valuation history. Entered at average 7–8x P/E across the prior five years; current 12x P/E. The 2–4x return range reflects the spread of investor entry timing across the position-build window; not a recommendation.