Meanwhile, also in 2023 YTD, the trend was the same; the auto index rose 35 percent against over 9 percent gain in Nifty.
In a recent note, domestic brokerage house Motilal Oswal stated that it has shifted focus to 2Ws amid the initial PV slowdown. In addition, MHCVs (medium and heavy commercial vehicles) remain stable, it added.
“While volumes of passenger vehicles (PVs), and tractors reached new highs in FY23, those of commercial vehicles (CV) and two-wheelers (2W) were relatively slower to approach their earlier peaks, suggesting that the extent of recovery differed between categories. Although growth in other sectors should stabilize, we are already witnessing a reversal in demand patterns, especially in the 2W segment, where we anticipate high growth potential, together with the MHCVs. We have modified our sector preferences in light of the same and now favor 2W s over other sectors, followed by MHCVs, while we are cautious about the PV outlook,” the brokerage said.
2W in focus as MHCVs remain stable
Positive at 2W and cautious at PV: The brokerage noted that India is already witnessing a reversal in demand patterns, particularly in the 2Ws, in which it foresees high growth potential. Compared to other categories, 2Ws have relatively better scope for growth over FY23-26E. On the other hand, the brokerage has become cautious about the PV growth outlook due to slowing demand trend and high base.
Positive view on MHCVs: According to the brokerage, growth momentum in MHCVs has been sustained, led by strong demand in all underlying industries. It forecasts the volumes of MHCVs to register a CAGR of 7-9 percent from FY23 to FY26E. This keeps MHCVs as the second choice MOSL within the auto pack. Tractors reported their highest volumes in FY23. It also expects minimal room for growth in both LCV (light commercial vehicles) and tractors over the next three years, with expected CAGRs for both ranging from 3-5 percent.
Stock options: The brokerage favors Tata Motors and Hero Moto among OEMs (original equipment manufacturers) and Endurance Tech and Craftsman Automation among auto helpers.
“We reiterate Tata Motors as our top pick in the sector, while we added Hero Moto as our second preferred pick among OEMs as it is a good proxy, especially on rural market recovery, with its stronghold in the 100cc Motorcycle segment. Among subsidiaries, we prefer Endurance as it is a proxy play to domestic 2W industry and Craftsman, driven by an ongoing CV growth cycle coupled with expectations of strong growth and superior capital efficiency,” it explained.
Automotive sector trends
2W improvement demand outlook: 2W demand recovery expected albeit at a slower pace. Demand sentiment improved in 1HFY24 as urban markets continued to do well, while rural markets are also showing signs of recovery, the brokerage said. It believes that new model launches along with the prior year’s lower base and improved supplies should drive 9-11 percent volume CAGR over FY23-26E.
MHCV is better placed among all sectors: The brokerage also noted that the fleet utilization level is expected to improve, led by growth in infrastructure-led activities, and improving demand from ports. However, replacement demand has not yet increased sharply and will be key to monitor in the coming quarters. It expects MHCV volumes to register a CAGR of 7-9 percent over FY23-26E.
PVs are seeing signs of growth moderating: MOSL also pointed out that PV shipments continue to witness healthy growth, led by new model launches and improving supply chain. However, it warned that there are signs of a slowdown in the lower segment, along with a decreasing waiting period for SUVs (partly due to improved supplies). It expects volumes to register 5-7 percent CAGR over FY23-26E.
Tractors to see growth in H2FY24: The brokerage also informed that volumes declined by 4 percent YoY in H1FY24 due to festive mismatch, uneven distribution of rainfall and elimination of subsidies in key states. While demand is expected to improve in H2FY24, MOSL believes FY24 volumes should remain flat YoY
Exports: Gradual recovery expected from H2FY24
Headwinds receding across key global markets: While the challenges related to global macros continue, the situation seems better this year relative to FY23. This was further supported by supply chain improvement and improved availability of semiconductors, MOSL said.
Management comments indicate an increase from 2HFY24 onwards: The brokerage further pointed out that most of the management comments indicated that exports remained under pressure in Q1FY24 but that they recovered sequentially in the second quarter. Headwinds have now started to moderate and exports should see a gradual recovery from H2FY24 onwards, it added.
Companies with high global exposure continue to trade at a discount: Within the MOSL coverage universe, several companies have material exposure in key geographies such as EU, NA, China, Africa and others. Most of these companies are trading (based on FY25E EPS) at a discount of 10-35 percent to their 10-year LPA, MOSL informed.
Q2FY24 margin
According to the brokerage, after a sharp rise in H1FY23, most of the raw materials witnessed a major correction in their prices. Commodities such as steel/aluminum/rubber/polymer have corrected 10-25 percent from their peaks. In 2Ws, the mix for >125CC models increased from 30 percent in FY22 to 33 percent in Q2FY24. Similarly, for PVs, the SUV mix increased from 45 percent in FY22 to 53 percent in Q2FY24, it informed. MOSL estimates gross margin/EBITDA margin to improve 210bp/260bp over FY23-26E for its OEM universe (ex-JLR), driven by operating leverage, cost control and product mix.
However, MOSL sees limited scope for EBITDA margin expansion over Q2FY24, as the gross margin is expected to peak.
Perspective
While absolute capex is expected to increase over the next three years, it will be significantly lower than revenue growth, the brokerage said. Also, the capex cycle looks more sensible now against the previous growth cycle as the average capex for FY24-26 is expected to be 3.6 per cent / 4.6 per cent of revenue for OEMs / subcontractors, it added.
Moreover, improved earnings visibility and lower capex intensity should help generate better free cash flows over the next few years, the brokerage predicted. It forecasts 36 per cent / 49 per cent CAGR in FCF (free cash flow) for the OEM/qualitative coverage universe over FY23-26E. This should result in an average FCF to sales of 6.6 percent each over FY24-26E versus 6.3 percent / 1 percent over FY17-19 for OEMs / auxiliary coverage, respectively, it predicted.
Shares
Tata Motors: While the Indian CV and PV businesses would see some moderation in growth in H2FY24E, the focus shifts to marginal expansionary revenue growth. JLR is witnessing a recovery, led by improving chip stocks, a healthy order book and a favorable product mix. This should help TTMT become pure cash by FY26 (from ₹437b in FY23). The shares trade at 14.7 / 14.6x each for FY24E / FY25E consolidated P / E and 4.1x / 3.2x EV / EBITDA. TTMT continues to remain its preferred purchase among OEMs with Dec’25E SOTP-based TP from ₹750, said the brokerage.
Hero MotoCorp: MOSL added HMCL as its second preferred choice among OEMs stating that it is a good proxy, especially on rural market recovery, with its stronghold in the 100cc motorcycle segment. It has low vulnerability to EVs as it garners 8 percent volumes from scooters and its core 100cc motorcycle is less prone to EVs. MOSL expects a market gain, driven by rural recovery (peak interest rates and inflation), and a new product launch every quarter. It sees revenue / EBITDA / PAT CAGR of 10 percent / 30 percent / 21 percent over FY23-25E. The stock currently trades at 15.2x / 14.3x FY24E / FY25E EPS. MOSL has a BUY rating with a TP of ₹3,850
Endurance Technologies: Given ENDU’s strong position in the 2W segment, it is the best proxy to play the India 2W opportunity, keeping in mind the underlying trends of premiumization and upscaling in scooters, the brokerage said. It added that due to its strong business franchise and management, the stock should continue to command premium valuation multiples compared to most domestic automotive utility companies. MOSL estimates consolidated revenue / EBITDA / PAT CAGR of 15 percent / 24 percent / 32 percent over FY23-25. It has a BUY rating with a TP of ₹2000.
Craftsman Automation: According to the brokerage, its track record of creating and acquiring market leadership organically is unusual in the auto components industry. This has enabled it to deliver a good balance of strong growth and superior capital efficiency. It estimates a consolidated revenue / EBITDA / PAT CAGR of 31 percent / 31 percent / 38 percent over FY23-25. However, the same is yet to be fully reflected in its valuations of 27.9x / 23.1x FY24E / FY25E consolidated EPS. MOSL reiterated its BUY rating on the stock with a TP of ₹5,800.
Disclaimer: The opinions and recommendations made above are those of individual analysts or trading companies, and not of Mint. We advise investors to check with certified experts before making any investment decision.
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Updated: 27 Nov 2023, 14:53 IST