Good value in auto sector: Experts

Vaishali Jajoo of Angel Broking believes over the long-term, two-wheeler growth is expected to be muted. "We do not have a positive outlook on the two-wheeler space," she said. 

Komal Iyer, Research Analyst at Sharekhan said the overall sentiment is quite negative, but there is good value that has come into the sector. In four wheelers, Maruti is a play that is better in terms of new product launches, she said.

Excerpts from CNBC-TV18's exclusive interview with Vaishali Jajoo and Komal Iyer:

Q: Currently we have seen a fair bit of selling pressure. There are a lot of headwinds in the auto space. People have spoken about interest rates, rising input costs, oil also on the boil. But has the selling been overdone? Are you seeing any sort of value currently in the auto space?

Iyer: Since the overall sentiment is quite negative, I think there is good value that has come in the sector.

Q: What would your buys be? Would you say that after the performance in the April and May period, the slowdown that we see in June would not last? Taking four wheelers first, how are you looking at that sector, where are your buys?

Iyer: When I talk of value, I am talking of the correction in the share price that has happened. But the overall weakness in the sector will really continue. April and May were actually good months because of preponement of sales and the wedding season. June is weak and going forward, Q2 could continue to be weak. Demand will pick up only with the festive season and beginning of which we will know how much demand really is picking up.

In four wheelers, Maruti is a play that is better in terms of new product launches. Volume growth that is happening better than other players and margins should also be slightly better than other players.

Q: In June despatch growth on the two-wheeler space was much stronger than the four-wheelers. Currently if you had to play the space, would you bet on two-wheelers with even oil as a percentage of ownership costs relatively lower than four-wheelers? What stocks do you like from the two-wheeler space currently?

Jajoo: We do not have a positive outlook on the two-wheeler space. Over the long-term, we expect two-wheeler growth to be muted. Definitely the growth that came in the last few months was because of last year’s low base. So, actual volumes are still down in that space.

Q: What are you expecting by way of earnings from the four-wheeler space? Which company according to you is likely to post strong earnings and do you have any buys there?

Jajoo: We have Maruti and M&M on the buy side, especially Maruti because volumes were still good in the last quarter. But maybe going forward in the next two to three months, we have to closely watched those numbers because I think volumes are going to go down from hereon at least for the next couple of months or so. In the second quarter there are a few launches like A-Star that may again have a fancy in Maruti.

We like M&M because of the investment portfolio. A lot of investments are lined up in their subsidiaries, which will unlock value in the long run. That is why we have M&M as a buy.

Q: What is the outlook on Tata Motors after the recent JLR acquisition and when do you sense the interest rate headwinds will recede?

Iyer: The acquisition that they have made is a strategic play for them and it is going to be a very long-term bet for them. In the immediate-term, it could surely exert pressure on profits.

Q: What are you looking forward to this earnings season from the entire two-wheeler and four-wheeler pack? Is there anything in your analysis that might outperform?

Iyer: I think only M&M could outperform because their volume growth has been good in this quarter, UVs and the tractor also because of the tractor mela that they had held. The management has been saying that they will be able to maintain their EBITDA margins at 10.5-11%. So, probably the company that could report a profit growth would only be M&M. Otherwise for the rest of the sector, we are seeing flat to decline in earnings.