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Business News/ Markets / Stock Markets/  These 2 stocks are favorite picks in the auto space ahead. Here's why
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These 2 stocks are favorite picks in the auto space ahead. Here's why

Despite these headwinds in the automobile sector, there are sub-segments within both, passenger vehicles and two-wheelers that have performed well.

TVS Motor and Maruti Suzuki are favorite picks in the auto basket. (Mint)Premium
TVS Motor and Maruti Suzuki are favorite picks in the auto basket. (Mint)

The road for the auto industry has been a bittersweet symphony in the past five years. Multiple challenges right from emission changes to the latest Covid-19 related bumps impacted the supply chain globally with the industry struggling to keep up the pace in their productions and sales due to semiconductor shortages. A host of other factors also played a major role in taking the sector on a slippery path. However, the sector is on a recovery path, and growth is expected to be driven by new launches and brand strength. TVS Motor and Maruti Suzuki are favorite picks in the auto basket.

Vivek Kumar and Ronak Mehta analysts at JM Financial in their automobile research note highlighted that the domestic automobile industry has witnessed multiple challenges during the past five years. Right from emission changes, mandatory TP motor insurance, safety-related regulations (mandatory ABS/CBS, driver-side airbags, speed warning alarm, seatbelt reminder alarms, crash test norms compliance, etc.) to numerous rounds of commodity-inflation led price hikes.

According to the duo, this led to increasing the upfront acquisition cost of a vehicle by 20-35%.

On top of that, JM Financial analysts pointed out that there has been covid-related supply disruptions, semi-conductor shortage, rural slowdown and jump in fuel prices by 40-50% during the same period.

However, despite these headwinds, there are sub-segments within both, passenger vehicles and two-wheelers that have performed well as per JM Financial's analysts.

Explaining new launches as a key to driving PV sales, JM Financial analysts stated that Over the last 5 years, varying by different PV sub-segments, the on-road price-to-customer has gone up by c.20-33%. However, UVs, including both SUV and MUV segments, have bucked the trend and managed to post a healthy c.12% CAGR (SUV:12% CAGR; MUV:11%CAGR) during the same period. This was driven by customer-pull and OEM focus for MUV/SUV-ish kinds of vehicles. The number of players in the SUV and MUV segment expanded from 14/2 in FY17 to 17/6 by FY'22, respectively. The segment witnessed c.40 new model launches, driving the share of the UV segment from c.25% to c.48% in the past five years. In contrast, the passenger car segment only witnessed 12 new vehicle launches, hence the subdued performance of this segment vis-à-vis the UV segment.

"We acknowledge, the Passenger car segment (mostly entry-level hatchbacks) is relatively more price-sensitive and susceptible to rise in fuel prices but then also gets supported by higher CNG model availability," JM Financial analysts note said.

Similarly in the two-wheelers segment, JM Financial analysts note stated that the impact of multiple disruptions and vehicle price hikes is evident across the board. Entry-level motorcycles are also impacted by the rural slowdown and steep 40% rise in petrol price. The higher-end motorcycle segment (>200cc) faced challenges procuring semiconductor chip supplies (RE monthly volume average FY19/FY21/FY22e:67k/48k/42k ). Entry-level motorcycle price has soared by c.35%, while the increase in the higher-end motorcycles is limited in the range of 20%, purely owing to the higher price base. However, even in this backdrop, one sub-segment outperformed the rest.

In terms of company-wise, analysts at JM Financials in the report said that during the last five years, Tata Motors’ domestic PV business witnessed the same headwinds as other OEMs. However, with the ‘New Forever range’, they revamped the entire product portfolio – launching 7 new models (PC:3; UV:4) in the last 3 years. These launches led to a volume CAGR of c.16% (- 0.9% CAGR for the industry) over FY17-22e. While the acquisition cost of Nexon has also increased by c.25-30% (like other products in the industry), yet market share has grown from c.6% in FY17 to c.12% for YTD’FY22 and its EBITDA margin improved from c.-12% in FY18 to over c.4% in FY22.

Further, they added in the research note that taking TVS as another case, despite steep price inflation in the entire 2W industry and with multiple headwinds, Apache portfolio, has performed well (volume CAGR 2% vs. -1% decline in 150-200cc motorcycle ex. of new entrants - Yamaha and Hero over FY17-22e). Strong brand pull & offering value proposition have helped it beat the segment performance.

"Basis this, we remain confident in Maruti’s new product cycle. We continue to like Maruti Suzuki and TVS Motor among domestic auto companies," the duo in the note added.

JM Financial has given a buy rating on Maruti. Vivek Kumar in a research note said, " MSIL launched five products back-to-back, including Ertiga, Ciaz, Brezza, Baleno, and S-Cross, with the success ratio was well over 80%. The previous product cycle played out effectively on both the crucial parameters of market share and margins. Visiting the features list in the Baleno 2022, we derive the same comfort and reiterate our BUY stance on MSIL. We ascribe 25x PE to arrive at Mar’23 fair value of 9,500."

On Wednesday, Maruti Suzuki shares witnessed a positive performance before closing at 7600.35 apiece up by 162.45 or 2.2% on BSE. TVS Motor also settled in the green at 622.25 apiece up by 9.65 or 1.6% on the same exchange.

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Published: 30 Mar 2022, 08:50 PM IST
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