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Hindustan Composites Limited (NSE:HINDCOMPOS), a ₹5.63b small-cap, operates in the auto industry whose long product cycles and deep capital outlays make planning ahead difficult. A challenge facing the sector is navigating the path to driverless cars, requiring high capital outlays in technology. Automobile analysts are forecasting for the entire industry, a positive double-digit growth of 23.3% in the upcoming year , and an enormous growth of 91.3% over the next couple of years. This rate is larger than the growth rate of the Indian Today, I will analyse the industry outlook, and also determine whether Hindustan Composites is a laggard or leader relative to its automobile sector peers.
See our latest analysis for Hindustan Composites
What’s the catalyst for Hindustan Composites’s sector growth?
The increasing presence of tech firms in the auto industry cannot be discounted by OEMs. Over the past year, the industry saw growth in the twenties, beating the Indian market growth of 21.8%. Hindustan Composites lags the pack with its negative growth rate of -0.9% over the past year, which indicates the company has been growing at a slower pace than its automobile peers. However, the future seems brighter, as analysts expect an industry-beating growth rate of 29.2% in the upcoming year. This future growth may make Hindustan Composites a more expensive stock relative to its peers.
Is Hindustan Composites and the sector relatively cheap?
The automobile industry is trading at a PE ratio of 22.47x, relatively similar to the rest of the Indian stock market PE of 19.88x. This means the industry, on average, is fairly valued compared to the wider market – minimal expected gains and losses from mispricing here. However, the industry returned a higher 13.8% compared to the market’s 9.3%, potentially illustrative of a turnaround. On the stock-level, Hindustan Composites is trading at a PE ratio of 24.49x, which is relatively in-line with the average automobile stock. In terms of returns, Hindustan Composites generated 3.1% in the past year, which is 10.6% below the automobile sector.
Next Steps:
Hindustan Composites has been an automobile industry laggard in the past year. It delivered lower earnings growth compared to its automobile peers in the near term, and it is also trading at a PE in-line with these companies. If growth and mispricing are important aspects for your investment thesis, there may be better investments in the automobile sector. However, before you make a decision on the stock, I suggest you look at Hindustan Composites’s fundamentals in order to build a holistic investment thesis.