As central banks across the world take liquidity out of the markets to combat inflation and the Russia-Ukraine war rages on, concerns of a slowdown in economic growth have increased. Analysts have started cutting corporate earnings estimates.
Even so, a few sectors have bucked the trend with their earnings estimates upgraded for FY23 and FY24. The most prominent among them is automobiles, which is benefiting as headwinds confronting the sector, particularly semiconductor shortages and high raw material prices recede.
Pankaj Pandey, Head-Research, ICICI Securities, now sees FY23 Earnings Per Share (EPS) for the auto sector at Rs 46 and for FY24 at Rs 56. This is on average 11.5 percent higher than earlier estimates.
In FY22, the sector’s EPS was Rs 29. That means, by FY24, earnings are likely to almost double for auto companies.
This compares with an up to 9 percent cut in earnings estimates for other sectors led by telecom and oil and gas. Overall, ICICI Securities expects and 1.8 percent reduction in earnings for FY23 and FY24 (for which sectors).
The positive outlook for the auto sector is also evident from increased analyst coverage.
A Motilal Oswal analysis said sentiment on the sector has been positive with analyst coverage of auto companies improving 8 percent year on year in August.
Not just that, it found that among the Nifty constituents, Maruti Suzuki and Bajaj Auto were the most widely covered stocks on the Street (54 analysts covering each stock).
Changing fundamentals
Semiconductor supplies have returned to normal and prices of key raw materials like metals are off 30-40 percent from their recent highs, relieving margin pressure on auto companies.
Also read: Auto stocks hitch a ride on demand surge to be mutual fund favourites
“Commentary from leading chipmakers suggests weakening demand in consumer-focussed areas; most are still seeing strong orders for autos. Easing chip supplies would be positive for most Indian auto OEMs (original equipment manufacturers),” according to analysts at Jefferies.
Demand momentum has been strong for leading automakers, especially those having a broad range of sports utility vehicles (SUVs).
Such models from the likes of Tata Motors and Mahindra & Mahindra have waiting periods stretching into months. For instance, after the launch of the Scorpio N, Mahindra received 100,000 bookings within 30 minutes.
“Clearly, the auto space seems to be in a sweet space now,” said Nilesh Shah, MD & CEO, Envision Capital. “Unless, of course, some of the key input prices like steel head even higher than what we saw earlier this year.”
Yes Securities, in an analysis of the sector, said the demand outlook for passenger vehicles (PVs) and commercial vehicles (CVs) remains positive.
“We estimate domestic PV volumes are expected to grow at 11 percent CAGR over FY22-25 (v/s -5 percent CAGR over FY19-22), led by new launches and healthy replacement demand,” the analysis said. “MHCV demand too to see healthy cyclical recovery and grow at ~18.2 percent CAGR over FY22-25 (v/s -38.4 percent CAGR over FY19-22).” MHCV is short for medium and heavy commercial vehicle.
Not surprisingly, the Nifty Auto index is up 32 percent in the last one year while BSE Auto is up 35 percent. The likes of Tata Motors and TVS Motors have zoomed by up to 88 percent in this period.
Also read: Auto component industry clocks $56.5-bn topline in FY22, aims for enhanced focus on EV parts
The valuation of auto stocks has become richer. The BSE Auto Index one-year forward price-to-earnings (P/E) is at a 48 percent premium to the Nifty, close to the highest level in 10 years, noted Elara Capital, adding that investors should be cautious.
What to buy?
Most analysts prefer four wheeler (4Ws) makers and CV makers in the auto space over those manufacturing two wheelers (2Ws) and tractors. Some also see brighter days ahead for auto ancillary companies.
“We prefer 4Ws over 2Ws on strong demand and a stable competitive environment. We expect the CV cycle to gather further momentum in FY23. Tata Motors, Ashok Leyland are our top picks among OEMs while we like Bharat Forge, Samvardhana Motherson International, and Endurance Technologies among ancillaries,” said Deep Shah, Lead Analyst at YES Securities.
Elara Capital’s top picks in ancillary space are Apollo Tyres, Uno Minda, SAMIL, Bharat Forge and Minda Corp. Angel One has a buy rating on Ashok Leyland and Sona BLW with targets at Rs 175 and Rs 843, respectively.
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