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Business News/ Markets / Stock Markets/  Nifty Auto outperforms with 10% YTD gains; Analysts careful on sector; Hero Moto, M&M, Maruti Suzuki among top picks
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Nifty Auto outperforms with 10% YTD gains; Analysts careful on sector; Hero Moto, M&M, Maruti Suzuki among top picks

The Nifty Auto index has significantly outperformed the benchmark Nifty 50, exhibiting a year-to-date (YTD) surge of over 10%, compared to the Nifty 50's more modest 2% gain during the same period.

This rally in automotive stocks is attributed to robust earnings for the quarter ending December 2023, fueled by substantial volume growth and improved operational performance. (Image: Pixabay)Premium
This rally in automotive stocks is attributed to robust earnings for the quarter ending December 2023, fueled by substantial volume growth and improved operational performance. (Image: Pixabay)

The automobile stocks have seen a decent uptick in 2024 so far with the Nifty Auto hitting a 52-week high on Monday. Among stocks, Bajaj Auto, Maruti Suzuki, Mahindra & Mahindra (M&M), Tube Investments of India, MRF, Eicher Motors, among others led gains among the index constituents.

The Nifty Auto index has significantly outperformed the benchmark Nifty 50, exhibiting a year-to-date (YTD) surge of over 10%, compared to the Nifty 50's more modest 2% gain during the same period.

This rally in automotive stocks is attributed to robust earnings for the quarter ending December 2023, fueled by substantial volume growth and improved operational performance.

In Q3FY24, auto companies reported positive year-on-year volume growth across segments. Enhanced realization growth was supported by premiumization and improved net pricing, while margin performance was driven by a favorable mix and benefits from easing commodity prices.

Moreover, the commentary of auto companies’ management for FY25 is positive across segments, baring Commercial Vehicles (CV).

Also Read: Nifty 50 touches new all-time high, extends gain for 5th day in a row

Despite the positive sentiment, some analysts express caution due to the recent sharp surge in auto stocks. 

Sudip Bandyopadhyay, Group Chairman at IndiTrade Capital, advocates a careful approach to automobile stocks, emphasizing a preference for auto ancillary companies, which often cater to the expansive global market. 

“I am careful on automobile stocks as the future price appreciation seems constrained. I rather prefer auto ancillary companies as most of these also cater to the huge global market. The Q3 results of the auto companies were good, except for tractors," said Bandyopadhyay.

The auto ancillary sector reported a 5% YoY revenue growth driven by improved Original Equipment Manufacturer (OEM) volumes and replacement demand in the tire sector. Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) margin witnessed a significant improvement of around 172 basis points (bps) YoY due to softened raw material costs and improved realizations. 

Companies in the sector indicate that raw material costs are expected to remain stable in the future, auguring well for profitability.

Among stocks, Bandyopadhyay prefers Hero MotoCorp as he expects the rural demand to pick up which will benefit the stock. Among auto ancillaries, he prefers Minda Corporation and Sona BLW Precision Forgings.

Also Read: Nifty 50, midcap, smallcap indices, most sectors overvalued, says HDFC Securities; advocates bottom-up stock picking

Brokerage firm Motilal Oswal Financial Services is positive on the outlook for the Passenger Vehicle (PV) segment, which is expected to see steady volume growth led by strong growth in Utility Vehicles (UV), thereby driving margin expansion for incumbents. 

While volume growth for the two-wheeler sector is likely to be the best, most of it seems already priced in the recent run-up of stocks. 

The brokerage expects CV growth to moderate to low single digits for FY25 and hence, it is not positive on the sector at the moment. 

M&M and Maruti Suzuki are its top OEM picks, while among auto component stocks, it prefers Endurance Technologies and Craftsman Automation.

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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 decisions.

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Published: 19 Feb 2024, 12:16 PM IST
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