Auto sector: Check out stocks on IIFL's buy list

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Auto sector: Check out stocks on IIFL's buy list

Prayesh Jain of IIFL in an interview to CNBC-TV18 gave reading and outlook for stocks in the auto sector.

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Excerpts from Markets Midday on CNBC-TV18 Watch the full show » ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets

Prayesh Jain of IIFL in an interview to CNBC-TV18 gave reading and outlook for stocks in the auto sector.

IIFL has upgraded Hero Motocorp to 'buy' from 'market performer' rating post results. "Their volume growth is tremendous and they have gained market share from the time they separated from Honda group. They have gained market share in the key segment of between greater than 75 cc to 125 cc," Jain said.

He expects Bajaj Auto to post strong quarterly numbers. "We are expecting EBITDA margin to be in the range of 19.5-20%. We might see the stock outperforming those numbers because this quarter has been pretty strong for them, he added. IIFL has a buy rating on Tata Motors because its valuations seem to be pretty attractive.

From the auto ancilary space, Jain sees Motherson Sumi and Exide Industries have the potential to give better returns."Motherson Sumi is very attractive stock to invest for a long-term perspective," he added.

Below is the edited transcript of Jain's interview with CNBC-TV18. Also watch the accompanying video.

Q: What are your thoughts on the stock performance of Hero? From hereon what do you expect to see?

A: We were positively surprised by the numbers. We were expecting the EBITDA margins to be around 12% after considering the royalty. They delivered around 12.2% and that's better than our expectations.

This is possibly a sign of margin recovery trend for Hero Motocorp. This is because key cost like branding is behind us, advertisement would be on higher side but that is being divided over higher number of vehicles sold.

Their volume growth is tremendous. They have gained market share from the time they have separated from Honda group. They have gained market share in the key segment of between greater than 75 cc to 125 cc. In scooters and premium segment of the motorcycles they have been able to maintain their market share.

Despite being present in so many pockets of the two-wheeler chain Honda  still are able to maintain their market share. They have not grown their market share tremendously in the last couple of years and that competition threat is overdone. We have upgraded the stock to buy from a market performer rating after these numbers.

Q: What is your target price on Hero Motocorp now? Can you give us view on Bajaj as the numbers are due tomorrow?

A: We have target price of Rs 2,205 on on Hero Motocorp. Bajaj Auto numbers will be pretty strong. We are expecting EBITDA margin to be in the range of 19.5-20%. We might see the stock outperforming those numbers because this quarter has been pretty strong for them.

Their exports have witnessed strong growth and they will have maximum margins in this quarter because of DEPB benefits being continued. Thus Bajaj Auto has a potential to even beat our numbers.

Q: What is your target price for Tata Motors because it's seen a steady rise from Rs 150 level?

A: Tata Motors has been on our buy list for sometime now because we find the valuations to be pretty attractive. We have given a target price of Rs 205. Jaguar-Land Rover (JLR) volumes have been very strong. They would possibly continue to remain strong especially in pockets like China and India.

With respect to their margins except for currency most factors are going to stay with JLR and margins will remain in the range of 15%. This gives confidence of giving buy rating considering that valuations are pretty attractive somewhere in the range of 5-5.5 times FY13 earnings.

Q: is there anything on auto ancillaries that you like and that you track?

A: In auto ancillaries we cover four stocks - Exide, Apollo Tyres, Bharat Forge and Motherson Sumi. We like Motherson Sumi and Exide Industries. We expect a very strong growth going ahead because of car sales or two-wheeler sales that has happened over the past few years.

The replacement market is going to be pretty strong for Exide. Motherson Sumi has a track record of delivering very strong numbers. Their valuation seems to be at fair level. It is now close to tier one player but is still getting valuation over tier two players. In those terms we believe Motherson Sumi is also very attractive stock to invest for a long-term perspective.