The Nifty Auto Index in the current year so far has rallied 29%. This healthy performance marks the fourth consecutive year of positive momentum for the index, following returns of 15.31% in CY22, 18.96% in CY21, and 11.46% in CY20. However, this year's performance marks the highest annual gain for the index since CY17.
For eight consecutive years over 2010–17, the Nifty Auto Index outperformed the broader Nifty-50. However, the Indian auto industry entered its worst downturn of decades starting in 2018, initially led by regulatory cost-push and financing issues that were later compounded by Covid and a sharp rise in commodity prices, said global brokerage firm Jefferies in its latest report.
Consequently, the Nifty Auto Index lagged Nifty-50 for four years in a row over 2018–21, underperforming the latter by 74%. But the index bounced back strongly, outperforming the Nifty-50 by 33% over 2022–2023 on the back of improving demand and margin trajectory, along with a good product cycle for several companies.
The brokerage noted that the primary driver for the stock performance under its coverage universe was an improving one-year forward earnings outlook (including growth from roll-over as well as consensus revisions), it also said that valuations have played a secondary role.
In the case of Tata Motors and Ashok Leyland, the rally can be wholly attributed to the favorable earnings outlook, while one-year forward PE ratios have contracted in 2023. Similarly, for Maruti Suzuki and Samvardhana Motherson International, the earnings outlook has accounted for over 85% of the gains in their stock values. For Mahindra & Mahindra, the core earnings and the value of its subsidiaries have been responsible for substantial returns.
On the other hand, TVS Motor, Sona BLW Precision, and Bajaj Auto have enjoyed the dual benefits of an improved earnings outlook and an expansion in valuations. In contrast, for Bharat Forge, the upswing in one-year forward PE ratios has contributed to nearly 80% of the stock's upward trajectory, according to the brokerage.
"While FY24-based multiples are not cheap for most stocks any longer, FY25-based valuations on our estimates are still in line-or-below long-term averages for most stocks. We find this reasonable in the context of the expectation of a strong double-digit earnings CAGR across our coverage over FY23–26E, the brokerage said.
The brokerage maintains 'buy' ratings on nine out of the 11 auto stocks within its coverage. It has revised the target price higher for TVS Motor to ₹1,750 from ₹1,550 and Maruti Suzuki to ₹12,000 from ₹11,500.
Other stocks under the 'buy' rating include Ashok Leyland, Bajaj Auto, Eicher Motors, Samvardhana Motherson International, Hero MotoCorp, and Sona BLW Precision. The brokerage holds a 'hold' rating on Mahindra & Mahindra and an 'underperform' rating on Bharat Forge.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before taking any investment decisions.