Auto stocks face earnings risk as CLSA cuts estimates on crude, supply disruptions

Auto stocks face earnings risk as CLSA cuts estimates on crude, supply disruptions

• India Auto Index drops 15% in 20 days due to supply issues
• CLSA reduced FY27 and FY28 earnings forecasts for auto OEMs by 3–13%.
• Target prices cut, long-term valuation impact minimal

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India’s auto sector is facing mounting pressure from rising crude prices and supply-chain disruptions linked to the Middle East crisis, with CLSA warning of potential earnings downgrades and further downside risks.

The India Auto Index has declined about 15 percent over the past 20 days amid concerns over production disruptions and sharp inflation in commodity costs. CLSA said that if disruptions and elevated commodity prices persist for the next two to three months, FY27 earnings could see cuts of 30–40 percent.

The brokerage said the key uncertainty is whether the impact remains limited to the near term or evolves into a broader earnings downgrade cycle. It noted that during the first Covid wave, auto OEM stocks corrected 30–45 percent over a 40-day period, indicating that a further 15 percent decline from current levels cannot be ruled out.

CLSA has already revised its estimates lower across auto OEMs, cutting FY27 and FY28 earnings per share by 3–13 percent. It also lowered Ebitda margin assumptions by 100 basis points, raised average selling prices by 3–4 percent to reflect price hikes and trimmed volume estimates by about 2 percent.

CLSA largely maintained its ratings across companies while lowering target prices following the earnings revisions. It retained an outperform rating on Ashok Leyland, Bajaj Auto, Eicher Motors, Escorts Kubota, Hyundai Motor India, Mahindra & Mahindra, Maruti Suzuki, Tata Motors Passenger Vehicles, Tata Motors Commercial Vehicles and TVS Motor, while Hero MotoCorp remained rated hold.

Target prices were reduced across the board, with Ashok Leyland cut to Rs 216 from Rs 227, Bajaj Auto to Rs 10,707 from Rs 11,410, Eicher Motors to Rs 7,454 from Rs 8,066 and Escorts Kubota to Rs 3,752 from Rs 4,313. Hero MotoCorp’s target price was lowered to Rs 5,437 from Rs 5,913, Hyundai Motor India to Rs 2,652 from Rs 2,853, Mahindra & Mahindra to Rs 4,448 from Rs 4,702 and Maruti Suzuki to Rs 15,961 from Rs 17,743. Tata Motors Passenger Vehicles’ target price was cut to Rs 440 from Rs 450, Tata Motors Commercial Vehicles to Rs 648 from Rs 673 and TVS Motor to Rs 3,846 from Rs 4,146.

Despite near-term pressures, CLSA said the long-term valuation impact remains limited. Its discounted cash flow analysis shows that eliminating FY27 free cash flow results in only about a 3 percent decline in target values for established OEMs.

The brokerage added that a further 10–15 percent correction driven by rising crude prices and ongoing supply disruptions cannot be ruled out. CLSA’s top picks in the sector include Mahindra & Mahindra, Bajaj Auto, TVS Motor, Tata Motors Passenger Vehicles and Ashok Leyland.