Auto Sector Q2FY24 Review: Maruti, TVS Motor among Axis Securities' stock picks after earnings; check full list

The September quarter was a good one for the auto sector. In an earnings review report, brokerage house Axis Securities said that the companies under its coverage reported revenue, EBITDA, and PAT growth of 16 percent, 49 percent, and 56 percent YoY, respectively. This was driven by higher ASPs, sales volumes, and operating leverage.

It further noted that the EBITDA margins expanded by 315 bps YoY on account of higher ASPs (led by product premiumisation) and higher operating leverage, led by higher sales volumes and softer raw material input costs. “Except for Escorts, all other companies under our coverage were largely in line with or beat our estimates,” stated the brokerage.

Meanwhile, for the auto ancillaries space, the brokerage informed that the companies under its coverage reported revenue, EBITDA, and PAT growth of 12 percent, 18 percent, and 18 percent YoY, respectively, driven by higher ASPs, sales volumes, and operating leverage. “All companies under our coverage reported in-line EBITDA or beat on EBITDA, except a miss for Endurance Technologies and CIE Automotive,” added Axis.

Read here: Agri input companies report mixed Q2 results amid global slowdown: Nuvama

Auto Sector: Outlook

Going ahead, the brokerage expects EBITDA margins to remain stable or even improve going forward. This will be led by a richer product mix, higher realisation, and positive operating leverage. However, the raw material tailwind could gradually wane as price benefits have already accrued in Q1/Q2FY24 for some companies.

Axis continues to have a positive outlook on the sector as demand drivers remain intact. However, due to the recent rally in stocks, valuations are not very attractive. Against this backdrop, it recommends the “Buy on Dips” strategy for quality stocks.

It expects 2W sales volumes to sustain in FY24, which will be led by new vehicle launches (especially in the premium category), an elongated replacement demand buoyed by the Indian growth story, and an expected revival in exports in H2FY24. Moreover, it expects the premiumisation trend to continue in FY24/25.

"PV sales will be led by the strong UV order book. However, we expect the growth rate to moderate in FY24 after a strong growth of 27 percent YoY in FY23. A longish CV cycle is expected by various OEMs on account of increased spending on infrastructure by the government. Tractor volumes may see marginal low single-digit growth/de-growth on the high base of FY23 due to deficient and uneven rainfall. We remain selective and for OEMs under our coverage, our top picks are TVS Motor in the 2W segment, Maruti in the PV segment, and Ashok Leyland in the CV space," Axis further stated.

Read Here: IT Sector review: Axis lists top hits and misses in Q2; picks 3 top stocks

For Auto Ancillaries, it noted that premiumisation and focus on EVs will drive higher content per vehicle, which in turn, will drive profitability. “Our Top Sector Ideas in the Ancillary space are – CIE Automotive Ltd.; Steel Strips Wheels.”

Top Sector Ideas: Auto

Maruti Suzuki: The brokerage has a ‘buy’ call on the stock with a target price of ₹11,800, indicating an upside of over 12 percent.

"The company’s EBITDA margins stood impressive at 12.9%, a 165bps beat vs. our estimates in Q2FY24, led by a confluence of positive factors. Higher volumes, sales mix, FX benefit, and drop in RM costs drove the beat. We foresee margins to remain elevated YoY in the coming quarters on account of soft RM prices, probable FX benefit and sales mix. With the easing of the semiconductor shortages, the pending orders at the end of Q2FY24 have come down to about 2.88 Lc units (3.55 Lc units as of the end of Q1FY24) and further corrected to about 2.5 Lc units. The higher share of premium MPV/SUVs in the sales mix will drive the Revenue/EBITDA/PAT growth in FY23-26E. We forecast Revenue/EBITDA/PAT CAGR of 14%/20%/19% over FY23-26E. De-growth in entry-level cars is a key risk for the stock," said the brokerage.

Read here: Five key trends in Q2 results revealed: Nuvama

Ashok Leyland: The brokerage has a ‘buy’ call on the stock with a target price of ₹205, indicating an upside of 15 percent.

"AL reiterated its earlier guidance of industry growth of 8%-10% YoY for MHCV. AL’s addressable LCV industry grew by 3% YoY in H1FY24 at a slower pace than the earlier full-year guidance of 4%-5% YoY for FY24E. LCV growth is expected to pick up in the medium to long term. Momentum in the overall CV industry growth is expected to continue in FY25 as well, thanks to favorable industry activity, strong replacement demand, and robust government Capex outlay. AL reported 11.2% EBITDA margins in Q2FY24 and has a mid-teen EBITDA margins target over the medium term. We expect margin performance to sustain moving ahead on account of i) Softening commodity prices, ii) Improving net realizations and lower discounts, iii) Cost reduction initiatives undertaken by the company, iv) Operating leverage driven by absolute volume growth, and v) Growth in the International business, Defense, Power Solutions, and Aftermarket which contribute higher margins," explained the brokerage.

TVS Motor: The brokerage has a ‘buy’ call on the stock with a target price of ₹2,100, indicating an upside of almost 21 percent.

"The market share of TVSL in EV in H1FY24 stood at 20%, which was higher than its market share of 16% in the ICE segment. We continue to like TVSL considering its strong focus on the pipeline of EV products ahead of incumbent 2W OEMs, product premiumisation in the ICE category, and growth in export markets. Moderate price hikes with RM tailwinds are expected to continue for H2FY24. Furthermore, as the company builds scale in EV volumes, margins from EVs will aid in overall margin improvement going ahead. Multiple new products are expected to be launched over the next 2-3 years targeted at 2W segments such as premium, sporty, commuter, delivery, and e3Ws," stated Axis.

Top Sector Ideas: Auto Ancillaries

CIE Automotive: The brokerage has a ‘buy’ call on the stock with a target price of ₹585, indicating an upside of 20 percent.

“The management indicated improvement in CY24 across segments and across customers, along with the addition of EV business (which forms 10% of the order book). We expect 9% CAGR revenue growth over CY22-25E in its Indian operations. The management also informed that new orders in EVs (74% in PVs and 50% in Metalcastello) are to ramp up in CY24E and onwards,” it noted.

Steel Strips Wheels: The brokerage has a ‘buy’ call on the stock with a target price of ₹325, indicating an upside of 14 percent.

“Exports revenue guidance currently stands at ₹500-600 Cr in FY24, which stands significantly more than the impacted base of ₹292 Cr in FY23. Exports volume in H1FY24 at 21 Lc units has already surpassed full-year volumes of FY23 by a significant 40 percent, indicating the desired pick-up in the export market. Total export sales in H1FY24 stood at ₹331 Cr, including ₹39 Cr from the alloy wheels segment. SSWL expects additional demand from International OEMs in FY25E to further aid in the company’s export growth by up to 15% YoY. The company also shared that supplies to 2W EV OEMs have started from Chennai and Dappar plants; having gained 50% market share in the Rear Wheel segment,” stated the brokerage.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision.