Automobiles & Auto Components share price target

With disparity in Navratri periods last year in contrast to this year, PV and 2W players reported strong double-digit YoY domestic growth topped with MoM improvement, as wholesales outstripped retails propelled by seasonality. On the flipside, in CVs, volume dipped MoM by ~20% for the leaders – this is alarming.

Is the auto sector revving back to life? A 20% YoY surge in September vehicle sales suggests that India’s auto market is shifting back into high gear. Climbing from 17 million to 21 million units within a year, the sector seems to be recovering from a prolonged slump, but it's not yet back to its 2020 peak of 26 million.

In September 2023, the automobile industry saw a 20.4% YoY increase in retail sales, amounting to 18.8 lakh units. Breaking it down, two-wheeler sales surged by 21.7% YoY, reaching 13.1 lakh units, and car sales grew by 19% YoY, totaling around 3.3 lakh units.

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

AUTO Q2FY24 Earnings Preview

Automobile wholesales of listed companies rose by 2.5% YoY to 15.5 lakh units in September, while exports increased by 3.1% YoY to 2,52,396 units. Domestic two-wheeler wholesales of listed companies increased by 0.8% YoY to around 11 lakh units and passenger vehicles rose by 2.8% YoY to 2.4 lakh units.

Auto Monthly Volume Sep 2023

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.