Most analysts and broking firms are positive about the domestic automobile sector for the medium term, anticipating healthy economic growth, easing inflation and a pause in rate hikes after the next few months.
The Nifty Auto index jumped over 15 percent last year while the equity benchmark Nifty clocked a minor gain of 4 percent.
The auto sector reported a mixed set of wholesale numbers in December.
While the month is considered seasonally weak for the sector, the high base month-on-month (MoM) and year-on-year (YoY) base also impacted the numbers.
Brokerage firm Kotak Institutional Equities pointed out that the domestic CV (commercial vehicle) and tractor segment’s volumes were ahead of its expectations; however, the 2W (two-wheeler) segment’s volumes were disappointing.
Kotak further said that the domestic PV (passenger vehicle) segment’s volumes were in line with its expectations, witnessing a growth of 7-8 percent YoY.
Volumes from the domestic 2W segment reported a mid-single-digit decline mom and the export 2W segment’s volumes remained under pressure. Kotak said that the tractor segment’s volumes increased 20-25 percent YoY and CV’s volumes at 14-16 percent YoY in December 2022.
The road ahead
Good monsoon and higher minimum support price (MSP) have improved the outlook for the rural economy which is expected to augur well for the two-wheeler and tractors segment. The PV segment, too, may see rising interest but the CV sector may take some more time to see healthy growth.
Deepak Jasani, Head of Retail Research, HDFC Securities believes automobiles can benefit in 2023 due to the large order backlog, easing of supply bottlenecks and expected improvement in rural incomes.
Brokerage firm Nirmal Bang Institutional Equities believes good progress in the sowing of Rabi crops, higher MSPs and good moisture content In soil will likely aid demand for tractors in the near term.
In CVs, while steady freight rates keep the CV demand steady, rising interest rates remain a key deterrent, said Nirmal Bang.
Brokerage firm LKP Securities believes the fourth and the last quarter of the year may witness stronger growth in the PV segment as the chip shortage issue eases further and new launches on both ICE and EV sides do take place.
Further, LKP said 2Ws shall further gain strength on the low base of last year, EV launches and good monsoon leading to better rural demand on the back of solid Rabi crop.
CVs are already continuing with their good run. Tractors shall report decent growth this year on good monsoon, Rabi sowing and improvement in the rural economy, said LKP Securities.
The brokerage firm is positive on the entire automobile sector and its choice is in the following order - CVs, PVs and 2Ws.
What to buy?
Within the 2Ws, LKP Securities is optimistic about Hero Motocorp as it believes the company is almost free from the exports weakness and is also led by strong monsoons barring a few eastern states, improvement in the rural economy and upcoming EV launches.
On the PV side, LKP likes Mahindra & Mahindra because of its thrust on rural markets through its leadership in the tractors business, prudent capital allocation and a robust growth strategy in UVs, EVs and CVs.
"We like Ashok Leyland within CVs as it has a diversified revenue base deriving from LCVs, defence, MHCVs, exports and spares. Every dip in the stocks mentioned above, shall provide good opportunities for investors to enter into them from medium to long term perspective," said LKP Securities.
Brokerage firm Motilal Oswal Financial Services has 'buy' recommendations on Mahindra & Mahindra (target price: ₹1,470), Hero MotoCorp (target price: ₹3,000) and Ashok Leyland (target price: ₹180) from the auto sector.
Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.