MOFSL view on Aurobindo, Tata Motors & other auto stocks

Two-wheelers are extremely well-placed, because a larger component of growth there is coming from the rural side, says Hemang Jani, Equity Strategist.

Let us start off with Aurobindo, because the spectacular debt reduction coming in is definitely going to be another trigger for the stock, which has also otherwise been seeing a decent price action. What is your take on the numbers and the commentary?
Aurobindo has been our preferred pick in the pharma space for a while, primarily because a large part of its revenue is coming from the US market and that is where we are seeing a fair bit of stability in pricing. Some of the Indian companies have been facing issues related to fewer prescriptions in April. So both API revenue stream component as well as US product basket are giving us a lot of comfort in terms of overall growth visibility. We continue to maintain our top pick status to Aurobindo Pharma in the pharma space. One could expect another 15-18% kind of upside in the stock from current price point.

I want to come to Tata Motors, because that stock has been on a high in last two-three sessions. We are hearing that there is a crucial board meeting for Tata Sons tomorrow where approvals will be sought for JLR and Tata Motors fund raise. What are you making of that and could this be what Tata Motors needs to really get the ship back on track?
One positive development for some of these global auto companies is the resumption of activity across key markets, be it the UK, euro zone, the US and China. Some of the auto companies globally have done well in this entire rally, and to that extent, Tata Motors has also participated. The issue with Tata Motors is that it has very high debt. Even if they raise money, the capital dilution could be very significant. On the domestic side, the CV cycle is going to take time and that is not giving much comfort. So we are not too positive on that sector per se. We are not so positive over there and have a neutral view on Tata Motors.

Do you feel auto sales numbers were incredibly dismal in May and does the likelihood of that continuing in June seem like a fair possibility? Do you expect to see any significant uptake before the festive season?
When you look at the auto sector, you need to understand that the dynamics for two-wheelers, four-wheelers and CVs are completely different. Our take is that two-wheelers are extremely well-placed, because of the larger component of growth there is coming from the rural side. In cars, yes, the story looks good from a one-to-two year perspective, but the thing is that growth will be much lower than what people were looking at. Maruti has already run up. The commercial vehicles (CV) space will continue to have its own challenges in terms of when the revival comes. I think two-wheeler as a space looks extremely well placed and to some extent tractors. These are the two areas within the auto space that one can really look at. We are extremely positive on Eicher, we have upgraded M&M and even Bajaj Auto continues to be one of our preferred picks.