Tata Motors is the top pick among auto stocks because the commercial vehicle (CV) industry is performing really well in the domestic market. Also, on the JLR side, things are improving, says Ashwin Patil, Equity Research Analyst, LKP Advisory
On M&M numbers
The company has come out with a decent set of numbers with margins slightly lower than our expectations, maybe about 10-20 bps. But overall the revenues as well as the bottom line wise, the company has performed really well. The most heartening fact is that in the company’s commentary that they have given, in Q3, they are seeing some sort of easing or improvement in the semiconductor chip issue. That is why they are expecting the volumes to get normalised from Q3 onwards. In Q4 again, we also are expecting a good bounce back in the volume numbers.
Even on the farm equipment side, the EBIT margins at about 18.6% are completely offsetting the decline in the auto margins at about 2.6%. We are seeing the raw material price pressures on the auto side but on the other hand, the market share wins in the tractor segment is helping them improve the margins as well as the utilisation rates.
So overall, the numbers have come out better than most of the Street participants and in line with their expectations. Going forward also, with good monsoons this year and rabi sowing happening at a good pace, maybe the farm equipment segment is set for an improvement again.
The YTD numbers are not looking that impressive because of the higher base of last year but considering good monsoons and as I said earlier with expectations of good farm output, the tractor numbers are also expected to be better than H1 of FY22. Overall, we are seeing a heartening improvement in overall numbers as well as the commentary for M&M.
On overall margins being reported by M&M
When the capacity utilisation moves up, definitely the volumes have to go up and the margins have to go up on the back of improvement in volumes. As the company is gaining a good market share on the high profit segment of tractors, it is poised for better margins in the coming quarters.
We can say that on the auto side as well. The bookings for XUV 700 is improving, As volumes improve on the auto side, the company can easily surpass the current margins and come close to about 13.5 to 14% margins over the next one year.
On what has been working well for M&M
On the tractor side, M&M is the market leader and it has lost some of its market share to Sonalika, TAFE, etc. But going forward, the company is also coming up with good models and products and being the market leader, it has more brownie points than other players in the segment.
Overall the company is in a good position to gain more market share coming from the overall growth in the tractor industry.
What is the best auto pick going ahead — M&M, Maruti Suzuki or Tata Motors?
The best pick would be Tata Motors because the commercial vehicle (CV) industry is performing really well in the domestic market. There has been a lot of improvements in the infrastructure segment as well as the overall economy and industrial production, construction industry, real estate, all are improving.
On a very low base of last year as well as the sequential improvement that the company is seeing on the CV side, that particular segment is really the brightest spot within the auto industry at this point in time. Secondly, it is also gaining market share on the passenger vehicle side. Currently it is close to 10 odd per cent and it is gaining market share because of new launches and significant revamping of their product portfolio.
Also, on the JLR side, things are improving. The semiconductor issue is also improving and overall geographical demand from various countries is very strong at this point in time. I think that Tata Motors is better placed followed by M&M and the third is Maruti.
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According to the agency, the ease in restrictions on movement of goods by various state governments and the recovery in the core infrastructure sector continued to remain positive for the CV industry.