The auto space is back in the game after a very long time. It is one of the best-performing sectors in 2023 year-to-date, after a tough post-COVID recovery.
The Nifty Auto index has surged over 22 percent this year so far as against an 8 percent rise in benchmark Nifty. Nifty Realty, up 25 percent, is the only index that has surpassed the auto index in 2023.
The recent rise in the auto space is driven by the decline in major commodity prices, which has led to an improvement in margins. Further, the availability of semiconductor chips has been encouraging. The automakers have overcome the challenges and bounced back impressively, say experts.
Going ahead, they believe that the introduction of new products and the anticipated rise in demand due to festive and wedding seasons are likely to positively impact the industry in the forthcoming quarters.
In the last 1 year as well, the Nifty Auto index has advanced over 20 percent versus a 12.5 percent jump in Nifty.
Constituents
This year so far, all Nifty Auto constituents have given positive returns on the back of an improved outlook and decline in headwinds.
Tata Motors is the top performer, soaring almost 58 percent in 2023 YTD, followed by Sona BLW, Samvardhana Motherson, and Bajaj Auto, rising over 30 percent each. Meanwhile, Ashok Leyland, TVS Motor, MRF, and M&M also jumped over 20 percent each this year.
What lies ahead?
Most experts have turned bullish on the space led by rise in demand, moderating commodity prices, and improvement in margins. Here's what experts say and their top auto sector picks.
Parul Sharma, Research Analyst, SAMCO Securities: The auto space is back in the game after a very long time. The decline in major commodity prices has been fruitful and margins have already started to improve. The availability of semiconductor chips has been encouraging and companies are fulfilling the gaps by adopting different strategies as evidenced by the increase in volume offtake. The automakers have overcome the challenges and bounced back impressively. So yes, the worst seems to be behind us.
Domestic-oriented themes are now dominating our country and thus, the auto industry presents promising opportunities for investors. We’re currently at the cusp of the mega-transformation of the industry as a whole. Exciting product launches and an increase in economic activities are anticipated to drive growth in the passenger and commercial vehicle segments. While the two-wheeler segment has been the slow mover, it is expected to improve in the future. More so, the demand for premium two-wheelers has been in the fast lane. The companies now have a richer product mix, soft commodity prices, new capacity expansion, and an uptick in volumes to foster the growth of the industry ahead. Investors can keep an eye on stocks like Mahindra & Mahindra, Bajaj Auto, and Ashok Leyland.
Suman Bannerjee, CIO, Hedonova: We believe that major headwinds for the auto sector are now easing, leading to a positive outlook. With the economic recovery gaining momentum, increased consumer spending, and easing supply chain disruptions, the auto industry is poised for growth. The global electric vehicle (EV) market is projected to experience significant growth, with its value expected to increase from $388.1 billion in 2023 to $951.9 billion by 2030, at a compound annual growth rate (CAGR) of 13.7 percent. This surge in demand for EVs presents a substantial opportunity for companies in the auto industry, especially those with a strong EV portfolio, to capitalise on the growing market and contribute to the sector's positive outlook. Our top picks are Tata Motors, Hero Motorcorp, Ashok Leyland.
Akshay Tiwari - Fundamental Analyst, Religare Broking: We believe that the semiconductor supply has improved significantly, however, there seems to be still some delays of chips for top model vehicles in the industry. Besides, commodity prices have been in a steady trend which has seen companies post strong EBITDA growth and better margins. Our outlook on the auto industry is bullish as we foresee strong demand in the upcoming festive season while recovery in some rural pockets would further aid growth in the industry. With strong demand and better operating efficiency, we anticipate healthy performance from most of the OEMs in FY24.
Top picks: Maruti Suzuki (Buy, Target: ₹11,501), Ashok Leyland (Buy, Target: ₹217), Eicher Motors (Buy, Target: ₹4,202), Bajaj Auto (Buy, Target: ₹5,582), and M&M (Hold, Target: ₹1,556).
Deepak Jasani, Head of Retail Research, HDFC Securities: We do believe major concerns for the auto sector are a thing of the past. Chip shortages are abating, commodity prices have moderated, and delivery timelines have compressed. However, we are still not out of the woods as the situation would take 1-2 quarters to become normal. Also once the waiting period for cars gets compressed, the emergence of new demand and the launch of new models will have to be monitored as currently there is a divergence between the waiting period of different models.
Coming on the back of a strong base year, we expect volume growth to remain muted. However, margins are likely to expand across verticals as higher prices get passed on and material costs stabilise. We believe companies with a strong product pipeline or healthy order backlog would be able to outperform the market in the coming quarters. Our top picks for the sector are Maruti Suzuki & Mahindra & Mahindra.
Mumuksh Mandlesha, Research Analyst, Anand Rathi Institutional Equities: We are positive about an upswing in the auto industry led by replacement demand, improvement in economic activities, and abating inflation. The rural economy is gradually improving led by higher income levels supported by government initiatives like an increase in minimum wage and MNREGA hike, etc. We expect close to double-digit growth in 2Ws and high single-digit growth in CVs and PVs over the next 2 years. Lower input cost to support margin improvement ahead. Preferred picks are two-wheeler OEMs.
Ashwin Patil, Senior Research Analyst at LKP Securities: Headwinds as such were in the form of chip shortage which is now easing fast. Any new regulations may act as an inhibitor. With commodity basket softening, the threat on margins is mitigated. So broadly we do not see major threats for the sector in the near future, apart from FAME -2 subsidy threat for EV 2Ws.
