Moneycontrol Pro Panorama | Auto stocks' value baked into price

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.