Will Q2 results bolster the outlook of D-Street’s best-performing sector?

NEW DELHI: Amid easing chip supplies and pent-up festive season demand, auto has emerged as the best-performing sector on Dalal Street in the last 6 months. Now, ahead of the September quarter earnings season, analysts expect margins to improve for the second straight quarter due to operating leverage benefits and raw material tailwinds.

"We forecast revenues for the auto stocks under our coverage to increase by 10% quarter-on-quarter (QoQ) in 2QFY23, led by an improvement in domestic 2W and PV production volumes amid easing supply chain constraints and channel filling before the festive period," Kotak Institutional Equities' auto analyst Rishi Vora said.

The brokerage expects EBITDA for companies under its coverage, except for Tata Motors, to increase by 20% QoQ.

Motilal Oswal expects EBITDA margin to improve by 310 bps year-on-year (YoY) and 130 bps QoQ for OEMs. Except for Hero Moto and M&M, all other OEMs are likely to report a YoY improvement in the margin (a QoQ improvement for all OEMs), it said in a report.

While giving no major upgrades to its EPS estimates for FY23, the brokerage has lowered its FY23 estimate for Tata Motors (-20%), Samvardhana Motherson (-13%), and Hero Moto (-5%).

On the back of improving sentiments driven by easing out of semiconductor supply, gross margin improvement and successful new model launches, auto stocks have been on a high in the last few months. With a rally of around 65% each, TVS Motor and Tube Investments have been the top gainers in the Nifty Auto pack in the last 6 months. M&M is up 53% while Eicher Motors has rallied over 40%.

Prabhudas Lilladher has warned against OEMs with exposure to global markets owing to inflationary scenarios across countries and rate hikes.

"We reduce our target PE multiple for Bajaj Auto (17x to 16x), Bharat Forge (30x to 28x) and Endurance (30x to 27x) to factor in fear of global recession. We roll forward and now value all our stocks on Sep-24E," it said.

Top auto stock picks
Motilal prefers companies with higher visibility in terms of demand recovery, strong competitive positioning, margin drivers, and balance sheet strength. Among OEMs, its top picks are Maruti Suzuki and Ashok Leyland. Within auto component stocks, it prefers Bharat Forge and Apollo Tyres. "We also prefer HMCL as a pure play on a demand recovery in the domestic 2W space," it said.

For Kotak, M&M remains its top pick.

Sharekhan's preferred picks include Hero Moto, Eicher, TVS, M&M, Maruti Suzuki, Escorts Kubota, Bosch, Sundram Fasteners and Ramkrishna Forgings.

Prabhudas' 3 top picks are - Ashok Leyland (Target price: Rs 200), M&M (Target price: Rs 1,500) and Eicher Motors (Target price: Rs 4,225).

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)