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Budget 2021

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Auto stocks in top gear as brokerages positive on the sector

Brokerage firm ICICI Direct pointed out that a healthy festive period and elements of pent-up demand, channel restocking led the auto industry to remain firmly on the recovery path in Q3FY21.

January 12, 2021 / 01:15 PM IST
 
 
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Most of the auto and auto ancillary stocks traded with gains in intraday trade on BSE on January 12, giving a boost to their sectoral index.

The BSE Auto index climbed over 2 percent in intraday trade.

Shares of Bajaj Auto hit their all-time high in intraday trade while those of Mahindra & Mahindra, Maruti, Tata Motors, TVS Motor Company, Ashok Leyland, Eicher Motors, Amara Raja Batteries, Motherson Sumi, MRF and Jamna Auto Industries were among those that hit their 52-week highs on BSE.

Auto and auto ancillary stocks have been gaining of late as brokerages and analysts believe the sector is poised for growth with broader economic recovery. OEM pack is likely to lead the recovery, brokerages believe.

As per the Federation of Automobile Dealers Associations (FADA), the auto retail sector saw growth for the first time in FY 2020-21 in the month of December.

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Vehicle registrations in December registered a rise of 11 percent year-on-year (YoY), which is a significant improvement from last month that had witnessed a slump of over 19 percent YoY.

With a likely pick-up in volumes, margin improvement, and lower CAPEX intensity, brokerage firm Motilal Oswal Financial Services expects a sharp improvement in FCF generation over FY21-23E for the sector.

"For our auto OEM (excluding JLR) universe, FCF conversion (percentage of PAT) is estimated to be at 100-125 percent over FY21-23E (as against 20 percent/33 percent in FY20/FY19)," Motilal Oswal said.

"Analysis of past cycles suggests that valuations expand as the cyclical recovery sustains, laying the foundation for the next upcycle. Current valuations reflect an early to mid-cycle recovery, with scope for a further rise if the volume expansion sustains," the brokerage added.

Brokerage firm ICICI Direct pointed out that a healthy festive period and elements of pent-up demand, channel restocking led the auto industry to remain firmly on the recovery path in Q3FY21.

"While topline performance is consequently expected to be strong across our coverage universe, margins are seen contracting sequentially on the back of a sharp rise in key raw materials like metals, rubber and other crude derivatives," said ICICI Direct.

The broking firm expects its coverage universe (excluding Tata Motors) to report topline growth of 15.9 percent with EBITDA margins at 11.8 percent (down 150 bps QoQ) and PAT growth of 17.8 percent YoY.

Including Tata Motors, the brokerage said its coverage universe topline growth is seen 8 percent YoY to Rs 1.65 lakh crore with corresponding margins at 11.6 percent (down 140 bps QoQ) and PAT de-growth

of 10.7 percent YoY to Rs 6,679 crore.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Nishant Kumar
first published: Jan 12, 2021 01:15 pm

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