Auto stocks are under pressure, with the sector index down about 15% in just 20 days as concerns around supply-chain disruptions emerge amid the Middle East crisis. CLSA has cut earnings estimates for most auto manufacturers by 3% to 13% for FY27 and FY28, factoring in cost inflation. Even so, it retained ‘Outperform’ ratings on several companies
CLSA on auto stocks
Rising input costs across steel, aluminium, rubber, and plastics are adding to the strain, prompting brokerages to revisit earnings expectations. CLSA has, however, identified a set of stocks with meaningful upside potential from current levels.
The brokerage said that the near-term pressure is real, but the longer-term impact on valuations remains limited. Its discounted cash flow analysis shows that even if FY27 free cash flow is entirely wiped out, target values decline by only about 3% for established players. It also says a further 10% to 15% correction in the sector cannot be ruled out, though such a fall could present an attractive entry opportunity.
CLSA on Mahindra and Mahindra: ‘Outperform’
CLSA maintained an ‘Outperform’ rating on Mahindra and Mahindra with a revised target price of Rs 4,448, implying a 46% upside, the highest among its coverage. The target stands lower than the earlier Rs4,702 after the brokerage trims FY27 and FY28 earnings estimates by about 5% to 6% and reduces margin assumptions to account for higher input costs.
It also lowered volume assumptions, cutting utility vehicle estimates modestly and trimming tractor volumes more sharply. Even after these revisions, CLSA continues to back Mahindra’s positioning in premium utility vehicles and tractors, where pricing power remains relatively strong.
Its valuation builds in contributions from both segments along with subsidiaries including Tech Mahindra and Mahindra Finance, with the tractor segment valued at 22 times and the auto segment at 25 times its FY28 estimates.
CLSA stated that the company’s premium mix allows it to pass on cost increases more effectively than mass-market peers.
“For OEMs that are more focused on the premium segment such as M&M, TVS, Bajaj Auto, and Eicher, we believe taking price hikes would be easier, as demand elasticity to price in the premium category is less than in the mass-market segment,” adds CLSA.
CLSA on Bajaj Auto: ‘Outperform’
CLSA retained its ‘Outperform’ call on Bajaj Auto with a target price of Rs10,707, indicating a 20% upside. The brokerage cuts FY27 and FY28 earnings per share by 4% to 5% as it factored in higher raw material costs and volume estimates trimmed by around 2% to 3%.
Its discounted cash flow valuation for the standalone business comes to Rs10,554 per share, with an additional contribution from its stake in Bajaj Mobility AG taking the total to the target price. The model uses a weighted average cost of capital of 11.2% and a terminal growth rate of 5%.
CLSA pointed to Bajaj Auto’s export-heavy business as a key advantage, with currency movements providing a partial cushion against rising commodity costs.
“For exporters like Bajaj Auto and TVS, currency tailwinds through higher export content would also partly cushion against commodity inflation relative to the domestic focused peers,” CLSA adds.
CLSA on TVS Motor: ‘Outperform’
CLSA maintained an ‘Outperform’ rating on TVS Motor with a target price of Rs3,846, implying an 11% upside. The brokerage cut FY27 and FY28 earnings estimates by 6% to 9% and reduces margin assumptions to reflect input cost pressures, including an EBITDA margin reduction of about 90 basis points for FY27.
Volume projections are also trimmed, though CLSA continues to see strength in the company’s premium motorcycle portfolio and export markets. Its valuation combines the discounted cash flow estimate for the core business with the value of its stake in TVS Credit.
The brokerage stated that the shift towards premium products gives TVS more room to raise prices without significantly affecting demand.
“We lower FY27 and FY28 earnings per share by 6% to 9% as we lower our volume and Ebitda margin estimates driven by input cost inflation,” as per CLSA.
CLSA on Tata Motors Passenger Vehicles: ‘Outperform’
CLSA has an ‘Outperform’ rating on Tata Motors Passenger Vehicles with a target price of Rs440, implying a 42% upside. The brokerage cuts earnings estimates for Jaguar Land Rover by 11% to 13% due to margin pressure from higher input costs.
Its valuation splits the business into Jaguar Land Rover and the India passenger vehicle arm, valuing each separately and adding contributions from Tata Technologies. While margins at the global business face pressure, CLSA raises volume estimates for the India passenger vehicle business on the back of new launches.
The brokerage said the upside largely reflects the sharp correction in the stock rather than any major upgrade in fundamentals.
“We cut FY27 and FY28 earnings per share for JLR by 11% to 13% as we lower our Ebit margin estimates led by inflation in raw material prices,” says the firm.
CLSA on Ashok Leyland: ‘Outperform’
CLSA retained its ‘Outperform’ rating on Ashok Leyland with a target price of Rs216, implying a 27% upside. It cut FY27 and FY28 earnings estimates by about 6% each and reduced margin assumptions to reflect higher steel costs.
The brokerage valued the company at 14 times its FY28 enterprise value to EBITDA, adjusting for its balance sheet and contributions from subsidiaries. It also noted that commercial vehicle makers remain particularly exposed to steel prices, which account for more than a third of input costs.
Despite the near term pressure, CLSA expects demand in medium and heavy commercial vehicles to remain supportive, with export volumes projected to grow about 30% in FY27 and 20% in FY28.
“For CV players, there is a stronger correlation between steel price movements and the impact on gross margins, as steel by value contributes more than 35% of their bill of materials,” says CLSA.
Conclusion
CLSA acknowledged that risks remained if supply disruptions and elevated commodity prices persist over the next few months. It stated another round of correction cannot be ruled out under such conditions.
At the same time, it drew a parallel with the first Covid phase, when auto stocks fell sharply before recovering as demand and margins stabilised. The brokerage’s analysis suggests that the structural impact on valuations remains limited, even under stressed assumptions.
Its preference remains tilted towards companies with pricing power, premium exposure and export strength. If commodity prices ease or stabilise over time, margin recovery is likely to follow, setting up a more stable earnings trajectory into FY28, the report said.
Disclaimer: This article provides factual analysis only and is not, and should not be construed as, an offer, solicitation, or recommendation to buy or sell securities. Investors must conduct their own independent due diligence and seek advice from a SEBI-registered financial advisor.