Nomura Bets On Motherson Sumi, Tata Motors, Bajaj Auto Amid Global Demand Recovery
Indian automakers and their parts suppliers that have a significant global exposure will be in a “strong position” to benefit from a recovery in demand across the world, according to Nomura.
“We expect a strong recovery in global automotive demand over 2021-22. The U.S. inventory levels are at only 23 days, about 40% below normal levels, and it could take up to December 2022 for inventory to normalise to 60 days,” the research firm said in a note. “Thus, production is likely to reach a new record of 18.3 million in CY22. Further, luxury demand recovery has been stronger across the U.S. and EU.”
Nomura Upgrades Motherson Sumi
Nomura expects Motherson Sumi Systems Ltd.—one of the world’s largest makers of automotive wiring harnesses and mirrors for passenger cars that counts Audi AG, Daimler AG and Volkswagen AG as its top customers—to be a key beneficiary of strong production, premiumisation and robust adoption of electric vehicles.
The share of overall electric vehicles in total auto sales in Europe had increased to 9% in the quarter ended March, and touched 3% in the U.S. in May 2021, the research firm said. While Tesla has remained a key driver, most large OEMs have aggressive EV launch plans. 25% of Motherson Sumi’s FY21 orderbook was from battery electric vehicles versus Nomura’s estimate of about 10% for the industry by 2025.
That prompted the research house to upgrade Motherson Sumi’s stock to ‘buy’ from ‘neutral’ with a target price of Rs 301 apiece, implying a potential upside of 27%.
Besides, Nomura prefers Bharat Forge Ltd., Tata Motors Ltd., Apollo Tyres Ltd. and Bajaj Auto Ltd.
Nomura 'Neutral' On Tata Motors
Strong demand has benefited margins of global luxury automakers as well. “We see less risk to Jaguar Land Rover’s margins over the next one year, although our medium-term concerns persist on lack of EVs and lower investments in research and development,” the research firm said. It upgraded Tata Motors Ltd. from ‘reduce’ to ‘neutral’ and raised its EV/Ebitda multiple for JLR to 2x from 1.75x.
For being bullish on Bharat Forge Ltd., Nomura credited the U.S. government’s $1.2-trillion infrastructure investment package. “High infrastructure investments can potentially spur growth in the U.S. demand for trucks and non-auto segments. Bharat Forge’s new lightweight forging business for passenger vehicles and EVs should also benefit from strong global demand,” it said.
Shares of Motherson Sumi and Bharat Forge gained as much as 4% and 3.34%, respectively, on Tuesday.
Nomura also highlighted certain upside and downside risks for some of its preferred bets.
Key downside risks
Lower-than-expected new order wins at Samvardhana Motherson Automotive Systems Group BV.
Slower turnaround of profitability for Samvardhana Motherson Peguform.
Lower-than-expected revenue growth at PKC.
Any material imposition of import tax in the U.S. could impact key clients (such as Audi), and thus affect its order book. The company, however, has plants in the U.S., which should moderate the impact.
Key upside risk: Stronger commercial vehicle cycle recovery in India and strong demand for JLR models globally.
Key downside risk: Market share loss in India CV market, success of EV launches by competition impacting JLR market share and volume growth.
In India business, truck demand recovery has been slower and there can be some risk to the near-term revenue estimates. But there can be further upside risks if strong demand and pricing environment sustains.