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Apollo Tyres To TVS Motor: UBS, Jefferies List Top Picks Among Auto Stocks

There are pockets of opportunities in certain auto stocks, according to UBS and Jefferies.

Motorcyclists park their bikes outside a Bharti Airtel Ltd. and a Vodafone India Ltd. stores in New Delhi. (Photographer: Prashanth Vishwanathan/Bloomberg)
Motorcyclists park their bikes outside a Bharti Airtel Ltd. and a Vodafone India Ltd. stores in New Delhi. (Photographer: Prashanth Vishwanathan/Bloomberg)

Jefferies and UBS see opportunities in certain Indian auto stocks even as the supply-side woes amid the ongoing geopolitical tension and mounting Covid-19 cases in China threaten to stall a nascent recovery in the sector plagued by a prolonged slowdown.

Since the start of 2018, the S&P BSE Auto Index has underperformed the Sensex. The auto gauge has dropped 10%, while the broader benchmark gained 66% during the period.

"This underperformance is reflecting part of the margin headwinds facing the sector. We see this correction as a good opportunity for long-term investors to buy into companies with strong fundamentals and catalysts," UBS said in a report.

Still, UBS cut its EBITDA margin estimates by 60-300 basis points across covered stocks to factor in "sustained higher commodity prices".

Domestic commuter two-wheeler and commercial vehicle original equipment makers have seen higher cuts, while component companies (excluding tyres) have seen lower cuts.

"Despite these cuts, the sector is poised for significant earnings growth of 36%/39% in FY23/24 with 30%/34% Ebitda growth due to a Covid-impacted base and cyclical recovery in demand," it said.

According to Jefferies, while passenger vehicles reported double-digit growth in FY22, two-wheeler wholesales had the third consecutive year of decline. In commercial vehicles, it was the first year of volume up-cycle for trucks, while tractors volumes fell, the research house said in its note.

UBS: Top Picks

TVS Motor Co., Mahindra & Mahindra Ltd., Maruti Suzuki India Ltd.

  • UBS sees the highest upside in TVS Motor, Mahindra and Mahindra and Maruti Suzuki given their attractive risk-reward profiles.

  • TVS Motor and M&M also stand out in their margin execution during FY20-22 amid record commodity inflation.

  • These three stocks also benefit from strong launch pipelines led growth and mix improvements, which should cushion cost pressures.

  • In TVS Motor, it expects imminent transactions at its financing arm and electric vehicle subsidiary, which could provide meaningful share price upside.

Bharat Forge Ltd., Eicher Motors Ltd., Ashok Leyland Ltd.

  • Companies with higher margins (Bharat Forge and Eicher Motors) are also better positioned to absorb the higher input costs than companies with lower margins such as Ashok Leyland Ltd. and Motherson Sumi Systems Ltd. (non-domestic wiring harness). However, a lower margin may not necessarily be a handicap.

  • Amid elevated commodity prices, UBS believes Bharat Forge is better positioned than OEMs to manage gross margins, as seen from historical trends.

Apollo Tyres Ltd.

  • Upgrades Apollo Tyres to 'buy' from 'neutral' with a price target of Rs 260 on its attractive valuation as "the company remains a good proxy to improving economic growth/ mobility trends in India" and is a beneficiary of the truck upcycle.

  • Its European operations are positioned strongly post restructuring. See strong financial leverage as the capex cycle for the company has eased in FY22, and ramp-up in operations and asset sweating gives us confidence in strong free cash flow generation and a rebound in return ratios.

UBS: Least Preferred Stocks

Hero MotoCorp Ltd., Bosch Ltd., Bajaj Auto Ltd.

  • Maintains 'neutral' rating for Hero MotoCorp and reduces price target to Rs 2,500 from Rs 2,850, driven by the sharp 15-16% cut in FY23 and FY24 earnings-per-share estimates.

  • Demand for entry commuter motorcycles continues to remain tepid, while commodity inflation continues unabated. While industry demand for exports and premium bikes continues to remain robust, Hero's market share in them is small with <10% of volumes.

  • Post the rally in Bajaj Auto, the stock has been downgraded to 'neutral' from 'buy'. The stock is pricing in most of the near-to-medium-term positives, while the impact of rapid electrification on the domestic three-wheeler industry and on the company’s profitability is being overlooked by the market.

Jefferies: Top Picks

Tata Motors Ltd.

  • Tata Motors' passenger vehicle share rose 4 percentage points year-on-year to a 10-year-high of 12% in FY22.

  • It was the top OEM in fast-growing SUVs in Q4.

  • Tata outperformed the industry in FY22 with 66% volume growth.

Maruti Suzuki Ltd.

  • Double-digit growth in FY22 in the passenger vehicles segment.

  • Maruti's market share fell 5 percentage points year-on-year to 43% in FY22, mainly led by a demand shift to the SUV segment.

TVS Motor Ltd.

  • TVS gained 90 basis points share in two-wheelers to a decadal high of 15%.

  • In scooters, Hero and Honda Motorcycle and Scooter India lost 2 percentage points share each, while TVS and Suzuki gained 1 and 4 percentage points.

  • Hero also lost 3 percentage points in motorcycles while Honda and TVS gained.