Automobiles & Auto Components share price target

We prefer Bajaj Auto, TVS Motors and Eicher in the 2W segment, Maruti in the PV segment, and Ashok Leyland in the CV space. In the Auto ancillary space CIE Automotive and Steel Strips Wheels are our top picks. Post the recent rally in stock prices, we recommend a BUY on Dips strategy

India’s automotive tyre space gross profit/kg improved from the Q1FY23 lows of ~INR 73 (in line with 10-year mean levels) to reach highs of ~INR 95 in the past couple of quarters (above mean + 1-standard deviation at INR 84). Going by historical trends, the industry has hardly sustained such profitability beyond three consecutive quarters and seen a mean reversion back to below mean + 1-SD levels.

We have analysed various auto ancillary businesses based on valuation multiples, likely earnings growth, RoE and several business risks. We believe there are some outliers in the list, on either side, in terms of valuation vs business fundamentals/risk led by fears of EV-led business disruption or EV-led opportunity driving higher growth.

We recently interacted with dealers of Maruti Suzuki, Honda Cars and Tata Motors CVs in and around the city of Kochi (in Kerala). Key takeaways from our dealer interactions include: 1) Value-for-money SUVs continue to drive retail demand, where customers are ready to pay in excess of INR 1.2mn on-road prices; 2) hybrid-model demand is being driven by status quotient of owning environment-friendly model and not unit economics.

Retail sales in the automobile industry rose by 8.6% YoY and 2.6% MoM in August 2023 to 18.2 lakh units. Two-wheeler retail sales also increased by 6.3% YoY to 12.5 lakh units, while car retail sales improved by 7% YoY to around 3.1 lakh units.

All segments of the industry, except for Tractor OEMs, observed a MoM rise during this period.

Automobile wholesales of listed companies fell by 0.6% YoY to 13.5 lakh units in August, while exports decreased by 2.2% YoY to 2,40,535 units.

Domestic two-wheeler wholesales of listed companies declined by 6.1% YoY to 9.4 lakh units and passenger vehicle wholesales rose by 13.1% YoY to 2.4 lakh units.

Despite festive season being from October this year as against September last year, PV players continued to increase systemic inventory by reporting yet another month of wholesales being ahead of retails, with inventory levels already being on the higher side in Jul’23-end. 2W companies in general, post managing inventory efficiently since Apr’23, reported volumes largely in sync with retails and in pockets increased inventory post keeping it under control till Jul’23 (example HMCL).

Domestic 2W retails in Aug’23 (1.26mn units) were up ~6% YoY and up 2% MoM, as low base till Sep’22 is helping the industry report YoY growth. However, with the end of marriage season in May-Jun’23, retails in Aug’23 remained subdued below 1.3mn. e-2W retails continued to be tepid though improving every month from the Jun’23 lows, and were at ~62k units vs 54k MoM and vs May’23 highs of ~104k units.

As per our channel checks and analysis of wholesale vs retail data of vehicles sold in Apr-Jul’23, inventory levels for PVs have increased vs CVs/2Ws managing it far better. Cumulative inventory addition for key PV players like MSIL/MM in Apr-Jul’23 is now at 84% of Jul’23 retails, implying limited scope for further inventory addition in Aug Sep’23.

Top Sector Ideas - Auto and Auto Ancillaries