Brokerage firm ICICI Securities is positive about the automobile sector as the brokerage firm believes the growth outlook of some of the key sectoral players is intact despite adverse macro indicators.
The brokerage firm said that the margin outlook is still better than at the moment in the calendar year 2021 for all players despite multiple adversities.
"In the first half of 2022 (H1CY22), the profitability of the key auto component makers globally on an average declined by about 200bps year-on-year (YoY) due to the combined effect of adverse operating leverage, elevated input commodity costs and rising power/fuel costs. The outlook of nearly 50-100bps improvement in profitability for the same companies in CY22, implies price hikes in the offing, benefits of raw material cost reduction and improvement in scale," ICICI Securities said.
The brokerage firm pointed out that the financial results of Indian auto component makers with large exposure to global markets clearly reflected the issues with respect to cost inflation, which in turn impacted margin in the past couple of quarters even though demand for most companies remained steady.
With most of these component exporters having the make-in-India business model, the cost escalation impacts blended profitability to a limited extent vs global peers. Thus, against about 25-30% correction in stock prices of global auto component peers in the past six months, the same for global Indian auto component players has corrected by hardly nearly 10% on an average from recent highs, ICICI said.
"Though we have built-in the subdued profitability for global operations in our estimates for H2FY23E, we do see scope for about 20-25% upside from current levels for the companies under our coverage," the brokerage firm added.
Major decline in input commodity prices and crude oil prices falling below US$80/bbl are the key upside risks while continued pressure on semiconductor supply, worsening of the geopolitical situation and return of inflation in input commodity prices are the key downside risks, ICICI Securities said.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.