Multi-year laggard auto stocks are on the rise; shares of key companies up 15% to 30% so far in 2022

Nifty Auto, the index tracking shares of automobile companies in India has given zero returns over a five-year period. On an annualised basis, the index is up merely 2% in the past five-years, trading at around 11,600 points. 

In the pandemic low of March 2020, Nifty Auto index fell below 4600 points. Auto stocks have been under pressure in recent years due to supply-side woes, low uptake in consumer demand and margin pressure caused by high raw material costs.

However, shares of automobile companies now are on the rise on the back of softening commodity prices (Steel and aluminium) and better Kharif expectations. 

Domestic hot-rolled coil (HRC) steel prices, fell by around ₹10,000 in the last one month. Prices have dropped by about 14% since the announcement of the imposition of export duty on steel and related products, according to Motilal Oswal.

One of the main reasons for the rise in commodity prices is the disruption caused by the ongoing Russia-Ukraine conflict. Russia is a key exporter of steel, coking coal, and pig iron. High commodity prices led to soaring construction costs and multiple price hikes by makers of automobiles, consumer appliances, and durables to pass on the increase, thereby tamping domestic demand. The hike in export duty was aimed at curbing this inflation, according to the CRISIL report.

Meanwhile, Indian steel prices had corrected from the peak of ₹75,000 per tonne to ₹61,500 in the trade market, as per Motilal Oswal's report. The report further said there is likely to be another round of correction in steel prices in India in the next quarter as well.

According to media reports, every 10% drop in steel prices potentially expands automakers’ margins by 60-200 basis points. A two-wheeler, a passenger car, and a heavy commercial vehicle, on average, weigh about 110, 800, and 3,000 kg of steel, respectively.

Furthermore, analysts believe that these duty cuts will aid demand recovery and lower the cost of vehicle ownership going forward.

The Nifty Auto index has increased 25.54% to 11,583.25 points (as of June 24) from its 52-week low of 9,226.95. In the last month alone, the index has gained 5.33%. Since the beginning of the year, it has increased approximately 969 points, to 11,583 from 10,775. With Friday's closing, the Index is just 3.53% away from its 52-week high of 12,139.

Since the announcement of the increase in export duties, the Nifty auto index has risen 3%, from 11,115 to 11,583 (as of June 24). The Nifty Auto index has gained 7.51% so far in 2022, while the benchmark Nifty is down 10.92% during the period.

Seven out of the 15 stocks in the Nifty auto Index have gained 15-30 per cent year to date.

Mahindra & Mahindra

M&M ranked first on the list. Shares of the company have zoomed 33.16% this year on the back of strong growth prospects.

Shares of Mahindra & Mahindra hit a fresh 52-week high of ₹1,081 on the NSE in Monday’s trade. The stock has zoomed by 62.28% from its 52-week low of ₹671.2.

The stock has risen 10.9 per cent in the last week. At 3:00 p.m., M&M's stock was trading at ₹1,083 per share, up 1.11%, versus a 1.02 per cent gain in the benchmark Nifty50.

Furthermore, the stock gained more than 42.00% in the last three months, compared to the Nifty's 7.8 per cent drop during the same period.

The company is the world's largest manufacturer of tractors and enjoys a strong presence in the utility and low commercial vehicle segments in the country. It had a market share of 22.79 per cent in the tractor segment in May 2022, according to data from FADA.

Meanwhile, M&M reported a 427 per cent increase in its standalone profit after tax to ₹1,292 crore for the quarter ended March 31, 2022. The company had posted a profit of ₹245 crore for the year-ago period.

In Q4 of FY22, the company sold 1,552,204 vehicles, a 43 per cent increase over the same quarter of the previous fiscal year. Tractor sales during Q4FY21 were recorded at 72,058, declining by 23 per cent from the same quarter last fiscal.

Further, auto exports increased by 77% year on year in the previous fiscal year, while farm export volume increased by 66% year on year to 17,500 tractors in FY22.

The firm noted that it recorded the highest ever standalone revenue for the auto and farm segments at over ₹55,300 cr for FY22, up 29 per cent. M & M also ranked first in SUV Revenue Market Share in the second quarter of FY22.

TVS Motor

Shares of TVS Motor have increased by more than 31.94% in the last six months. The stock has zoomed by 62.73% from its 52-week low of Rs. 495. With Friday's closing price of Rs.804, the stock is just 1.32% away from its 52-week high, which it had previously hit on Nov. 09, 2021.

In the last one month, the stock gained 10.99%, compared to the Nifty 50 index, which shed 1.41% in the same period. Further, the stock generated an 86.06% return as compared to the Nifty Auto, which gave investors a 46.93% return over a 3-year time period.

The stock traded at a price-to-earnings (P/E) multiple of 50.14, while the price-to-book value ratio stood at 7.26. The return on equity (ROE) was at 18.53 per cent.

The company said that it had sold 3,02,982 units in May 2022. A major contribution to the total figure came from domestic two-wheeler sales, which grew by 268 per cent YoY. Except for exports, the automaker saw growth in almost all sectors. Compared to May 2021, when TVS sold a total of 1,66,889 vehicles, sales have grown by 81 per cent.

For the entire financial year (FY22), the company's net profit went up 46% to ₹894 crores. Revenue from operations grew by 24% to Rs. 20,791 crore. Total two- and three-wheeler sales for the company increased 8% to 33.10 lakh units.

Bajaj Auto

Shares of Bajaj Auto have gained over 14 per cent in 2022 (YTD) so far, whereas the auto stock is down about 11 per cent in a year’s period. The stock gained 25.99% to ₹3,814 from its 52-week low of ₹3,027.

The stock is currently trading near its 52-week high of Rs. 4259.65, which it last reached on June 23, 2021, and it is 11.69% away from its 52-week high using Friday's closing price of Rs. 3,813.35.

Bajaj Auto Ltd. reported a 10 per cent growth in net profit for the March 2022 quarter at ₹1,469 crore as against ₹1,332 crore in the corresponding quarter of the previous fiscal. The higher profit was mainly due to an exceptional item of ₹315 crore accrued as an incentive receivable from the Maharashtra government under an incentive scheme.

The company has paid dividends to shareholders since FY08, with the amount going up each year: from ₹20 per share in FY08 to ₹140 per share at the end of FY22. Its aggregate dividend payout during the same period rose from ₹289 crore to ₹4,051 crore at the end of FY22.

Maruti Suzuki

Maruti Suzuki's shares have rallied 16.51 per cent so far in 2022. In the last three months, the stock has risen by 14.47%. Further, over the last one year, the market price of the stock has increased by 11.09 per cent.

The stock gained more than 6.89% in the last one month, compared to the Nifty's 1.41 per cent drop during the same period.

The stock's 52-week high and low levels were Rs. 6,536.55 apiece and Rs. 9,050.00 apiece, respectively. Taking Friday's closing price into account, the stock has risen 26.54 per cent from its 52-week low.

The company reported a profit after tax of ₹1838.9 crore in the March quarter, up from ₹1,166.10 crore in the corresponding quarter last year, a nearly 58 per cent rise year-on-year.

Year on year, net sales increased 11.1 per cent to ₹25,514 crore, up from ₹22,958.60 crore in the previous quarter.

Maruti Suzuki sold 4,88,830 vehicles during the quarter, a 0.7% decrease from the same period last year. The sales in the domestic market stood at 4,20,376 units, a decline of 8% over that in Q4FY21. While sales in the export market were at 68,454 units, which is the highest ever in any quarter.

"Maruti Suzuki's product pipeline has just kick-started with upgrades of key models and it is on the cusp of launching new models. While the return of the product lifecycle will drive market share recovery, strong demand, improving supplies, and stable commodity prices will propel EBIT margin improvement for MSIL," said Motilal Oswal in its research report dated June 14, 2022.

The brokerage firm has given a "BUY" rating to Maruti Suzuki with a target price of Rs. 10,000/share, implying a 19.97 per cent potential upside from the 24 June closing price.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.