Moneycontrol Pro Panorama | Auto stocks' value baked into price

December quarter results of two leading OEMs – Bajaj Auto and TVS Motor Company – beat expectations on the Street.

Dear Reader, 

Auto stocks have been among the top performers lately. In the last one year, the Nifty Auto index zoomed 43 per cent, ahead of the benchmark Nifty 50 that returned about 19 per cent. Auto original equipment manufacturers (OEMs) have been spewing out strong sales numbers month after month, underscoring sustained demand. Adding to this are tailwinds from news around product launches and benign raw material prices that have lifted profit margins, after some painful quarters last year.
December quarter results of two leading OEMs – Bajaj Auto Ltd and TVS Motor Company Ltd- beat expectations on the Street. Double-digit revenue growth compared to the year-ago period and about a 100 basis-points (bps) operating margin expansion justified the narrative of sustained earnings growth. But all this optimism seems to be baked into the respective stock prices. Why the present valuations look elevated is highlighted in MC Pro’s Research team analysis here and here.

Over the next few days, more auto OEMs such as Tata Motors, Hero MotoCorp, Eicher Motors are expected to declare their results that are likely to follow a similar trend- strong earnings growth baked into valuations.

To be sure, Nifty auto index valuations have come off slightly in the last couple of weeks on reports of demand moderation in some segments such as passenger vehicles and commercial vehicles. Tractors too seen to be going through the cyclical downturn. The high base will affect growth for these segments in the next couple of years.

A recent report by BNP Paribas on the Indian automotive landscape highlights reasons why it expects demand growth to moderate to single-digits across the sector over FY2025-26. Economic recovery has not been broad based, which raises concerns on sustaining the strong automotive demand growth. It cites specific reasons such as concerns of K-shaped recovery looming still along with fears of unemployment along with missing real rural wage growth. Meanwhile, news on exports is not comforting enough to offset slowing domestic demand.

In other words, it may be prudent for investors to moderate earnings growth expectations from the auto pack. Of course, the Interim Budget ahead of general elections may sprinkle some incentives/subsidies, particularly for rural areas, that may make positive headlines and drive up overall investor sentiment.

Auto companies’ strategies to boost demand through new launches and refreshes in the absence of strong underlying success is likely to meet with limited success. Also, the noise around electric vehicles including the expected Ola Electric IPO may help keep investor interest in auto stocks elevated.

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Vatsala Kamat
Moneycontrol Pro