September auto sales cheered not only the industry but the equity market, too, as they also signal an improvement in the economy battered by the coronavirus outbreak.
The September numbers showed an encouraging uptick, thanks to positive sentiments across rural and semi-urban areas, a shift towards personal mobility and the expectations of a strong demand during the festival season.
Among the two-wheeler companies, Hero MotoCorp and Bajaj Auto saw their volumes growing 16.9 percent and 23.8 percent, respectively, from the year-ago period.
Eicher saw a growth of 3.7 percent, indicating that demand is picking up not only in the affordable segment but also in the premium category. TVS Motors, however, posted a decline of 0.5 percent in its monthly sales.
In the tractors segment, Escorts’ sales grew 8.9 percent from the year-ago period as they were operating at full capacity, Mahindra & Mahindra registered a growth of 17.2 percent.
The growth in sales of passenger vehicles came as a pleasant surprise. Maruti Suzuki’s monthly volumes grew 36 percent year on year (YoY) in September.
Brokerage firm ICICI Direct said the auto industry recorded a credible recovery in Q2FY21, with manufacturing and distribution activities sustaining an upswing in each successive month during the period.
Time to shift gears on auto stocks?
The uptick in auto sales is encouraging and it appears that investors have started picking quality stocks.
For the sector, analysts advise being segment and stock-specific. Most of them are positive on two-wheelers and tractors, owing to their connection with the rural economy that looks bright.
“In the auto space, one needs to be segment-specific. We are positive on the two-wheeler segment as it appeals to pricing point and offers better mileage. Tractors is another segment where demand remains buoyant amid better monsoon and farm output,” said Rusmik Oza, Executive Vice President and Head of Fundamental Research-PCG, Kotak Securities.
“In the case of passenger vehicles, the volume recovery in the month of September could be an inventory push from the OEMs to fill the channel before the festive season. However, there is a certain element of pent-up demand also in cars that are leading to actual sales. This could be mainly to drive personal vehicles in times of the pandemic and its spread. We are less optimistic about the commercial vehicle segment due to consistent weak demand,” Oza added.
The key is the sustenance of the sentiment.
Brokerage firm Motilal Oswal pointed out while the festival season is expected to be highly fruitful, the sustenance of demand is the key parameter to monitor.
Valuations are reflecting recovery from the second half of FY21, leaving a limited margin for safety for any negative surprises, Motilal Oswal added.
“We prefer companies with: a) higher visibility in terms of demand recovery, b) a strong competitive positioning, c) margin drivers, and d) balance-sheet strength,” Motilal Oswal said.
Stocks to buy
Oza of Kotak Securities recommends Bajaj Auto (target price Rs 3,400) and Mahindra & Mahindra (target price Rs 725) in the auto space.
Motilal Oswal has “buy” calls on Hero MotoCorp (target price Rs 3,900), Eicher Motors (target price Rs 2,475), Maruti Suzuki (target price Rs 7,600), Mahindra & Mahindra (target price Rs 723), Tata Motors (target price Rs 227) and Ashok Leyland (target price Rs 72).
Emkay Global Securities has buy calls on Ashok Leyland (target price Rs 89), Atul Auto (target price Rs 258), Bajaj Auto (target price Rs 3,691), Eicher Motors (target price Rs 2,754), Escorts (target price Rs 1,256), Hero Motocorp (target price Rs 3,701), Mahindra & Mahindra (target price Rs 718) and Maruti Suzuki (target price Rs 6,910).
Anish Rankawat, Research Analyst at Nirmal Bang Institutional Equities has buy recommendations on Maruti Suzuki India (target price Rs 7,778), Mahindra & Mahindra (target price Rs 836), Bajaj Auto (target price Rs 3,615), Hero MotoCorp (target price: Rs 3,890), Eicher Motors (target price Rs 2,581) and Ashok Leyland (target price Rs 99).
Siddharth Sedani, Vice President, Equity Advisory, Anand Rathi Shares and Stock Brokers has buy calls on Hero MotoCorp (target price Rs 3,653) and Escorts (target price Rs 1,326).
Saji John, Research Analyst at Geojit Financial Services has buy calls on Escorts, Maruti and Hero MotoCorp.
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