The auto sector rose over 15 percent in 2022 on the back of a recovery in demand post the pandemic and as the chip shortage issue eased in the semiconductor industry. However, going ahead most analysts have mixed views on the space.
Headed for a rise or fall? Here's where 7 experts see the auto space going in next 6 months
Going ahead most analysts have mixed views on the space. While the pent-up demand is fading and the sector is facing rising interest rates and further price hikes expected the export; However, margin improvement is expected due to a decrease in commodity prices and price hikes.
While the pent-up demand is fading and the sector is facing rising interest rates and further price hikes expected the export; However, the earning season is progressing, and margin improvement is expected due to a decrease in commodity prices and price hikes.
"The sector in the past three fiscals saw muted or negative growth due to a general economic slowdown weakening demand as mobility was restricted and income was subdued for the buyers during the pandemic. Adding to this was a steep rise in prices due to the transition to BSVI emission norms, and the cost of owning vehicles increased due to higher crude oil prices, increased insurance, and higher inflation. Headwinds further piled on as shortage of supplies because of disruptions, and semiconductor shortages affected vehicle production. Supplies are increasing now with the availability of semiconductors, and companies reporting large order books due to multiple model launches by OEMs should increase sales in 2024," Anil Rego- Founder and Fund Manager at Right Horizons PMS explained.
Let's see how 7 analysts expect the auto sector to perform in the first half of 2023:
1) Saji John, Research analyst at Geojit Financial Services sees a mixed glimpse of the sector, where pent-up demand is fading, and SUV-driven growth is getting overcrowded by multiple launches. He further noted that the demand for premium two-wheelers remains stable as the rural mood is improving due to better harvesting and export, even as the export sales are subdued. Meanwhile, EV and scooter penetration in the urban market is witnessing order build-up.
Further, the heavy CV segment is growing well due to the low base and upswing in economic activities, construction projects and increase in cement consumption, highlighted John. Positively, the earning season is progressing and expects margin improvement due to a decrease in commodity prices and price hikes, however, he believes it is important to keep an eye out on the economy on the back of high inflation and interest rates, which are expected to moderate future growth. Overall, John continues to have a neutral rating on the sector with a positive outlook on CVs in the short to medium term.
2) Aniket Mhatre, Institutional Research Analyst, HDFC Securities also believes the first half of 2023 is likely to be a mixed bag for the auto industry.
At one end, the sector demand remains at risk given high inflationary pressure, rising interest rates and further price hikes expected to post the upcoming RDE norms wef April 2023. On the other hand, OEMs are likely to benefit from softening input costs, which would help cushion some or a large part of the above headwinds," he pointed out. In this scenario, Mhatre believes companies with a strong product pipeline would be able to outperform the market and emerge as major beneficiaries of a softening commodity cycle. His top picks for the sector are TVS Motors, Mahindra & Mahindra, and Maruti Suzuki.
3) Nirvi Ashar - Fundamental Analyst, Religare Broking has a more bullish view of the auto space. She expects auto stocks to be back in action in 2023, on the back of government focus on infrastructure like roads, etc., rising demand for SUVs and EVs, availability of credit and rising income levels will aid in driving volumes for the companies. Further, new launches largely in the SUV segment, better realization and declining raw material prices will support growth as well as improve margins, Ashar added. She expects passenger and commercial vehicles companies to do well and her top picks are M&M, Maruti Suzuki and Ashok Leyland.
4) Ram Kalyan Medury- A SEBI-registered investment advisory firm also expects Auto stocks to do well in the next 6 months, particularly those catering to the EV space. The 2-wheeler industry in particular will see an export push and will be further aided by increased demand emanating from a growing economy, it said.
5) Anil Rego- Founder and Fund Manager at Right Horizons PMS expect the sector to be amongst the top performers in 2023
"We are bullish on OEMs (original equipment manufacturers) with multiple model launches, strong order books, and healthy operating cash flows. Demand recovery in CV and PV segments is expected to grow steadily, and profitability is expected to improve due to moderation in commodity prices. The CAPEX announced by the companies will sustain the growth, and hence we expect the sector to be amongst the top performers in 2023," he said.
He expects CV domestic segment volumes to rise, driven by the materialization of replacement demand, an improving manufacturing industry and healthy demand from the infrastructure segment. Demand for models in the EV segment, improving rural sentiments backed by a regular monsoon and increased minimum support prices (MSPs) across crops are expected to drive two-wheeler sales, he added.
6) Vinit Bolinjkar - Head of Research - Ventura Securities is also positive on the space. He expects the high-end 2W market (350+ cc motorcycles) is expected to do well compared to the economy and mid-size segment (100-200cc motorcycles/scooters). Eicher Motors is the only listed player in this segment and generates better EBITDA margins of 23-24 percent than Bajaj Auto (16-17 percent), TVS Motor Co (12-13 percent) and Hero Motocorp (11-12 percent), he informed.
Due to its niche product portfolio and better margins, Eicher Motors commands a premium valuation of 20.3 FY25 P/E, compared to 15.3X of Bajaj Auto and the valuation gap is likely to sustain, noted Bolinjkar.
Meanwhile, in the CV space, he expects Ashok Leyland (FY25 P/E of 16.5X) to do well due to an increase in demand for trucks from the infrastructure and construction segment. In the PV space, he is bullish on Maruti Suzuki (FY25 P/E of 18.0X) due to the recent launches in the UV segment which could boost the company’s revenues and profitability in the near future.
The growth in auto OEM space is expected to enhance the order book for ancillary players, especially which are EV agnostic, such as Jamna Auto (18.0X FY25 P/E), Minda Corp (14.7X FY25 P/E), Endurance Tech (20.4X FY25 P/E), Sundram Fasteners (22.1X), he further stated.
7) Aditya Welekar, Senior Research Analyst - Metals, Mining, and Auto, Axis Securities maintain a positive outlook on the sector for the first half of 2023. However, he foresees a more challenging landscape ahead as pent-up demand of FY23 over the low base of FY22 subsides across segments. Furthermore, real-time driving emission norms (from Apr 23), safety regulations related to six airbags from Oct 23, and higher interest rates could pose additional challenges for auto OEMs across segments as it will further increase the cost of acquisition of vehicles, he added. Welekar expects slower growth in the PV and 2W segments due to regulatory impact leading to an increase in vehicle prices. Also, with the commodity prices bottoming out, the tailwind of lower raw material costs could vanish in the upcoming quarters, he added.
"We remain selective and prefer a stock-specific approach toward the auto sector in the first six months of 2023. Our top picks in Auto OEMs over the next six months are Ashok Leyland and Uno Minda," he said.
Ashok Leyland in the CV: (1) CV up-cycle to sustain in FY24, infrastructure focus in the budget could provide support to CV cycle (2) Marketing efforts and AVTR range success (hydrogen power train introduced) (3) In Auto Expo’23 the company showcased its preparedness in a variety of power trains: BEV, Fuel cell EV, Hydrogen ICE, LNG Vehicle, Intercity CNG Buses, and electric truck Boss. The company also showcased a new electric LCV, the IeV (under Switch Mobility). The primary risk could be higher interest rates limiting sales off-takes.
Uno Minda in Auto ancillary: We expect Uno Minda to grow ahead of the Industry growth. It has a diversified product mix, EV orders, and exposure to Airbag manufacturing.
In the longer term, over 12 months and above, he likes Maruti Suzuki, TVS motors, and Eicher motors.
Maruti Suzuki in PV: (1) Robust order book of New Brezza and Grand Vitara (2) New launches in Auto Expo’23: Baleno-based SUV coupe Fronx and 5-door Jimny via Nexa channel to further help regain SUV market share (3) Showcased New Powertrain under development -first born electric SUV MarutieVX and WagonR Flex Fuel. (4) Rs.10,000 Cr capex by parent Suzuki for battery cell manufacturing and BEV by FY25 (5) Recent price increase by 1.1% (by ~ ₹10k – 25k across portfolio except for Grand Vitara) to further increase ASP per vehicle. (6) Strong marketing reach and distribution network. The primary risk is multiple launches from competitors, which will make the UV space more cluttered and competitive in the future.
TVS Motors in 2W: (1) We expect TVS motor’s premium bikes and focus on EV scooters will put it at an advantage over its peers. (2) New launches in the EV scooter space will be the key trigger points. TVS i-Qube production is expected to reach 25k units pm in Q1FY24. Key risks: Competition from new age pure-play EV players.
Eicher Motors: (1) Hunter 350 success and robust RE/VECV volumes, along with premium bikes, fit well on the premiumization trend in 2W. (2) Strong pipeline of new products starting with Super Meteor 650 cruiser (at an attractive price point filling the gap left by Harley Davidson Street 750) to refresh global product portfolio (3) Investment in CKD facilities in strategically crucial markets- Argentina, Colombia, Thailand and Brazil (recently in Q3FY23). The main risk is the cannibalization of Hunter 350, leading to the dilution of ASPs.
personal financeManik Kumar Malakar