Auto industry has seen a storm of headwinds in the last 4-5 years, which resulted in a higher cost of ownership, lower affordability and restrictions in vehicle supplies (due to chip shortages).
Thus, domestic volumes declined for Incessant challenges have hurt the performance of the auto sector, with Nifty Auto index underperforming the Nifty over the last five years by a CAGR
The profit of auto companies in Nifty has declined from INR 280 bn in FY18 to INR 250 bn in FY23E vs the 13% CAGR in Nifty’s earnings over similar period.
The auto sector’s weight in the Nifty had consistently declined from 10.6% in FY18 to 5% in FY22 and has now inched up to 5.6%.
Most of the headwinds are now receding, aided by: 1) the absorption of cost inflation at the customer level, 2) the realization of pent-up demand, and 3) improvements in the supply chain.
This was evident in better consumer sentiment and volume recovery in 9MFY23 for all the segments Improving demand is supported by a favorable mix (premium segment doing better than entry segment) and favorable FX (for exporters).
As a result, we estimate gross margins/EBITDA margins to improve by 110bp/180bp over for the Nifty Auto universe
We expect the Nifty Auto profit pool to see a We expect growth in all segments over
As a result, the auto sector’s contribution to the Nifty50 earnings is expected to improve from the low of 1.3% in FY22 to 6% by FY25E (similar to FY19).
After witnessing consistent downgrades in earnings over the last 3-4 years due to incessant headwinds, 3QFY23 was the first quarter of big upgrades.
Consequently, we are also witnessing an increase in the allocation to the Auto sector by the Top-20 mutual funds in India, which has risen to 8% in Jan ’23, the highest in the last four years.
This has led to an overweight position on the auto sector by 210bp, the highest in the last six years.
Given the improving narrative on demand, supply, and margins, we expect the auto sector’s earnings to grow significantly on a flat base of five years.
A sharp 26% earnings upgrade for the Nifty Auto in 3QFY23 and positive management commentaries offer a stronger outlook for the sector.
We believe the worst of the Auto down-cycle is behind even as valuations are reasonable. Here are stock recommendations for next 1 year:
Maruti Suzuki: Buy| LTP INR 8310| Target INR 10500| Upside 26%
New launches such as the Brezza and Grand Vitara are seeing good customer pull. Driven by the new product launches, Maruti is looking at the SUV segment market leadership in FY24.
Good demand and favourable product lifecycle for Maruti augurs well for market share and margins.
The company could gain further market share, driven by an expected shift toward petrol /hybrid vehicles, resulting
This, coupled with an improved mix and lower discounts, is expected to drive ~16% revenue
Tata Motors: Buy| LTP INR 418| Target INR 540| Upside 29%
A strong recovery in JLR, sustained resurgence of the India business, and a possible monetization of its stake in Tata Technologies (possible value of INR25-47/share for TTMT) are the key catalysts for the stock over next 12 months.
We expect JLR (including JVs) to see a 15% volume CAGR over FY23-25. Its India CV business is on a strong footing and is primed for a strong cyclical recovery in both M&HCVs
Its refreshed product portfolio will enable a sustained recovery in its PV business (~11% CAGR), aiding market share gains.
(The author is Head – Retail Research, Motilal Oswal Financial Services Limited)
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)