Experts are bullish on auto stocks as they expect sales to pick up in near future as festival sales near.
Automobile sales in August witnessed mixed trends with car manufacturers registering modest growth of 6.06 per cent, while bike manufacturers posted a decline of 9.6 per cent, according to data from the Society of Indian Automobile Manufacturers released last week.
Medium and heavy commercial vehicles (MHCV) which account for around 40 per cent of the total commercial vehicle sales posted growth of 35 per cent yoy during the period while light commercial performance remain subdued resulting in total commercial vehicle sales growth of 7.6 per cent yoy.
The industry is expecting sales to pick up in near future. Emkay Global Financial Services in a research note said, “August 2015 volume performance was marginally impacted by a slightly delayed festive season this year, which would lead to inventory build-up only beginning September. All segments reported growth in-line with their recent performances. The brokerage house expects around 20 per cent growth in MHCV industry, an 8-10 per cent growth in PV sales and a 3-4 per cent growth in 2-wheeler industry growth (with a downward bias) in 2015-16.”
Two-wheelers sales declined by 3 per cent year-on-year(yoy) in the month of August owing to poor monsoon, delay in festive season and dampened rural sentiment. Amongst the two-wheelers, scooters sales grew by 16 per cent yoy while motorcycle sales declined by close to 10 per cent yoy.
In the past two months, BSE Auto index declined 4.4 per cent to 17,710.18 on September 14. During the period, share price of Hero MotoCorp and Bajaj Auto declined 11 per cent and 7.5 per cent to Rs 2,348.60 and Rs 2,310.50 respectively. Market experts believe two-wheelers and tractors sales are likely to remain under pressure owing to deficient rainfall (monsoon so far has been 16 per cent below normal) and only a moderate rise in minimum support price (MSPs).
According to Angel Broking, “Rural focused segments are likely to remain under pressure on the back of poor rainfall and only a moderate rise in MSPs. The tractor industry is likely to decline marginally while the two-wheeler industry is anticipated to grow only in low single digits in the ongoing financial year 2015-16.”
Share price of Ashok Leyland and Maruti Suzuki jumped 20.90 per cent and 6.7 per cent to Rs 89.55 and Rs 4,320.15, respectively, on September 14 from Rs 74.05 and Rs 4,048.70 on July 14. However, Tata Motors, Eicher Motors and Mahindra & Mahindra declined 10.1 per cent, 9.4 per cent and 7.6 per cent, respectively, during the same period.
Below are a six auto stocks that brokerage houses believe will be a good bet for investors in long-term.
Recommended By: Sharekhan
Why Buy: The stock price of Tata Motors has witnessed a sharp 40 per cent correction from the peak over the past six months. The fall has been primarily on account of the negative cues coming from China, which is a key market for Tata Motor’s luxury car division, ie Jaguar Land Rover (JLR). China has been the driver of growth for JLR with an impressive 47 per cent volume CAGR over the last five years and 25 per cent volume contribution in 2014-15. According to Sharekhan, the company’s domestic operations have been severely affected over the past couple of years due to a sharp slowdown in the commercial vehicle (CV) industry. The problems have been compounded by the continued poor performance of the passenger vehicle (PV) division (market share has fallen from 14.2 per cent in 2011-12 to mid-single digit in 2014-15). However, the medium and heavy commercial vehicle (MHCV) industry has witnessed a recovery over the past year and the same is expected to continue, while the light commercial vehicle (LCV) segment, wherein Tata Motors is a large player, is also expected to bottom-out over the next six months. Additionally, new launches and brand promotion would drive revival for the PV segment. The brokerage house believes the stock has a potential to generate returns of 45-50 per cent from the current levels over the next 12-18 months. The weakness in the stock is an excellent opportunity for investors to enter in the stock with a long-term perspective.
Recommended By: LKP Securities
Why Buy: On a year-to-date basis, the share price of the company jumped 29 per cent to Rs 4320 on September 14. According to LKP Securities, the company has maintained their promise of launching at least one model every year. After the Celerio launch last year, the company launched Ciaz and has now launched the SUV S-Cross which is getting a good response with strong order book. Going forward, the company is coming with an LCV and a hatchback in the ensuing quarters/year. The brokerage house is expecting strong festive season on the back of improving demand for cars and the low base in line with the spreading out of festive season this year. With improving macros such as reducing fuel costs, expectations of a rate cut in the upcoming RBI policy meet, wide product portfolio, attractive pricing, a made for India psyche associated with the company and a deeply entrenched distribution network, Maruti Suzuki is better placed than its peers although they come out with new launches. Lower discounting, better product mix and currency benefits will continue to assist margin improvement. Furthermore, recent news that Gujarat plant commissioning will lead to increased production of high margin products such as Swift and Dzire will be leading to further scope for healthy earnings growth. After the current fall in the stock, Maruti shares look attractively priced as far as valuations are concerned. LKP has ‘BUY’ rating on the stock with a target price of Rs 4,891.
Recommended By: Finquest Securities
Why Buy: The recent rupee depreciation against the dollar should benefit Bajaj Auto in a big way as 47 per cent of sales come from exports. The company has a slew of launches lined up in the next six months and most of these products are in segments (cruisers and sports category) which are less affected by sluggish rural markets. The recent hit from Bajaj Auto, the RS200 could provide a decent upside to the bottomline once the capacity constraints in the Chakan plant ease. Finquest believes the recovery of the motorcycle market is still sometime away and now its more of a play of market share gains that Bajaj Auto has to look for, and looking at the product pipeline the brokerage house expects it to outperform its peers. Earnings are expected to grow at a CAGR of 22 per cent in the next 2 years while currently it trading at 15x FY17E earnings. The company could easily trade at 18x FY17E EPS and factoring in the investment in KTM. The share price of the company can touch Rs 2,717. On September 14, the scrip was at Rs 2,310.
Mahindra & Mahindra
Recommended By: Sharekhan
Why Buy: The deficient monsoon rainfall has cast a shadow on the recovery in tractor demand for 2015-16 (FY2016) as sentiment is expected to remain subdued. Mahindra & Mahindra (M&M), the market leader in the tractor segment is bound to bear the brunt of the same. The lack of products in the popular compact utility vehicle (UV) segment has been a gap in M&M’s UV portfolio. The launch of TUV3OO is the company’s much awaited entry into the compact UV space. The vehicle is priced competitively as compared with competition and two jump seats at the back give the vehicle a flexibility of seating seven passengers. M&M will be launching another vehicle in the segment (code name S101) which will have monocoque chassis and will have a more urban styling. The launches are expected to revive M&M’s flagging market share in the UV space. Considering the below-par monsoon for a second year in a row, Sharekhan believes the weakness in the tractor segment to persist in FY2016. Although a sharp decline in October-March period is not expected given the low base of last year, a meaningful recovery in the segment would be delayed to FY2016. Hence, the brokerage house has cut its tractor segment growth estimates for FY2016. Consequently, earnings estimates for FY2016 and FY2017 have been lowered by 6 per cent and 3 per cent, respectively. However, given the expectation of a pick-up in the UV volumes (on the back of new launches) and a recovery in the tractor industry in FY2017, Sharekhan has maintained ‘Buy’ recommendation on the stock with a revised price target price of Rs 1,450 (vs Rs1,550 earlier). On September 15, the share price of Mahindra & Mahindra was at Rs 1,151.55.
Recommended By: Religare Securities
Why Buy: The company’s 2W segment (Royal Enfield) maintained strong growth momentum reporting sales of 42,360 units in August (59 per cent yoy growth), driven by production ramp up at the new Chennai plant. Royal Enfield continues to witness strong demand traction with the current waiting period at 4-6 months despite steep increase in production. Eicher Motors’ CV sales grew in healthy double digits (20% yoy) to 3,711 units mainly due to low base of the corresponding previous year period. On a year-to-date basis, the share price of Eicher Motors gained 23.45 per cent to Rs 18,813.10 on September 14. According to Religare Securities, Eicher Motors can touch Rs 22,500 in the next 12 months. The company continues to dominate the premium motorcycle market with its iconic Royal Enfield brand. CV volumes too are expected to post a healthy 19 per cent CAGR as benefits from a cyclical demand recovery and premium launches kick in. Valuations are appealing and the recent correction offers a good entry point for investors.
Recommended By: IndiaNivesh Securities
Why Buy: Atul Auto is the only pure play 3‐W manufacturer in India. With around 17.9 per cent share in the goods carrier segment and 5 per cent share in the passenger carrier segment, the key brands of the company are Shakti, Smart, Gem and Gemini. Despite challenging macro environment the company has performed well in last couple of years (25 per cent CAGR growth in revenue and 21 per cent CAGR growth in volume from 2010-11 to 2014-15). Volume have been improving on the back of added dealerships and increasing geographic presence (especially in semi rural and rural area) along with market share gains in existing markets. IndiaNivesh believes with further capacity addition and new petrol product launch, Atul can efficiently tap export markets along with urban markets in India and, thereby, continue the strong growth momentum. The entry into petrol segment, increasing capacity and overseas footprint could lead to faster growth in market share in the coming years. The brokerage house expects the share price of the company can touch Rs 471 in coming months.
On September 14, it was at Rs 417.30.
(Disclaimer: The stocks are recommended by the respective brokerage houses and not a recommendation from Financial Express online)