Auto Stocks To Buy: Auto stocks continued to be in the fast lane as the relentless buying, barring intermittent consolidation, helped the Nifty Auto index outperform. Most analysts are turning bullish on auto stocks as Q1 volumes recover across segments and supply side issues seem to be easing, with an improvement in the supply of semiconductors. The Nifty Auto index hit a record high on July 19, ahead of June quarter earnings and the management commentary about the future outlook.
The Auto index has surged 35 per cent in a little over four months, which is an excellent performance and far better than any other sector during the same period. The benchmark Nifty50 has gained just 4 per cent during the same period.
The decline in commodity prices especially metal, fall in oil prices, improvement in monthly sales numbers (though it was on back of low base as June 2021 quarter was impacted by second COVID wave) and easing of semi-conductor supply issue supported the rally in auto segment.
Earnings Expectations
HDFC Securities expects M&M to be the best-performing auto company in Q1, with an estimated 41 per cent growth in earnings quarter-on-quarter (QoQ). “This strong performance is likely to be driven by a sharp shift in mix towards its high-margin tractor segment (44 per cent of the total in Q1 from 32 per cent QoQ). Even auto volumes have remained stable QoQ, given the strong order backlog and chip shortage impact gradually reducing,” it said in a report.
Arun Agarwal, Deputy Vice President – Fundamental Research, Kotak Securities, said: “Auto industry volumes are expected to witness growth this year. Supply chain constraints have so far impacted production volumes in the passenger vehicle segment, however, OEMs expect the supply chain to improve over the coming months. Commercial vehicle segment volumes have already started to recover and this trend is expected to continue. Any improvement in rural demand will be positive for the tractor segment and entry-level two-wheeler demand. With some correction in commodities, gross margins will likely expand for OEMs in the coming quarters.”
Key Things to Watch Out
Talking about the key things to watch out for in the upcoming earnings season, Axis Securities said: “a) The management commentary around potential demand outlook going forward (especially for the domestic 2W industry), any cost-benefit from lower commodity prices; b) Impact of semiconductor shortages and supply chain constraints on production and sales, c) Channel inventory across segments, d) Updates on upcoming product launches and e) Order visibility, update on replacement market, and commodity prices for ancillaries.”
Top Stock Picks
Motilal Oswal likes Maruti Suzuki India and Ashok Leyland among OEMs. Within auto components, it prefers Motherson Sumi Wiring India and Tube Investments of India
HDFC Securities has BUY ratings on Hero MotoCorp, TVS Motors, and Mahindra and Mahindra within OEMs and Bharat Forge within ancillaries. It has ADD ratings for Eicher Motors, Maruti Suzuki, and Apollo Tyres.
Axis Securities’ top positive plays are Ashok Leyland, Eicher Motors, Maruti Suzuki, Automotive Axle, and SSWL
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