JPMorgan, Indian Autos -- Interest Cycles and 'Motor'cycles

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 As  the  auto  sector  is  sensitive  to  interest  rates,  we  analyzed  stock
price  returns  through  the  various  rate  cycles. As  policy rates  have
risen considerably over the recent past, BSEAUTO Index returns are
moderating. As expectations build up that the interest rates will start
rolling over, we highlight that  the Auto sector is  a late cycle play
on falling interest rates.
 While  an  initial  uptick  in  interest  rates  does  not  impact  demand,
BSEAUTO  Index  returns  suffer  as  interest  rates  reach  elevated
levels. During this phase, two wheeler OEMs deliver superior returns
(as  compared to their  four  wheeler  OEMs),  given that the  former  is
less  sensitive  to  interest  rates  (financing accounts  for  30%  of  two
wheeler sales vs. c.75% for four wheelers).
 When  interest  rates  start  rolling  over,  the  BSEAUTO  index  returns  
improve  only  with  a  lag  - the  sector  is  a  late  play  on  falling  rates,
given that the retail lending rates decline with a lag post the decline in
policy  rates.  During  this  phase,  four  wheeler  stocks  outperform  as
demand  revives.  (Currently,  our  J.P.  Morgan  India  Financials  team
view  is  that  rates  will  rise  another  50-75bps  from  here  before
stabilizing / moderating).