Revolutionizing the Road: The Indian Auto Industry’s Explosive Comeback!

The Indian automotive industry is shedding its ‘underperformer’ label from the past four years and is poised to achieve a double-digit earnings Compound Annual Growth Rate (CAGR) between FY23 and FY26, according to a report by Jefferies. The investment firm has selected nine out of eleven stocks in its automotive portfolio as attractive options for investors.

Jefferies has identified Tata Motors and TVS Motor Company as its top picks from this selection. Additionally, they express confidence in Maruti Suzuki India (MSIL), Ashok Leyland, Bajaj Auto, Eicher Motors, Hero MotoCorp, Samvardhana Motherson, and Sona BLW Precision Forgings. However, the brokerage rates Mahindra & Mahindra as ‘hold’ and Bharat Forge as ‘underperform’.

Despite multiples based on FY24 estimates no longer being considered cheap for most stocks, Jefferies finds the valuations based on FY25 estimates to be reasonable. This assessment aligns with their expectation of robust double-digit earnings growth across their coverage from FY23 to FY26.

The Nifty Auto Index, which had trailed behind the Nifty50 for four consecutive years, experienced a remarkable turnaround in 2022-23, outperforming by 33%. This resurgence has been primarily driven by an improved one-year forward earnings outlook rather than favorable valuations, as outlined in Jefferies’ report.

The brokerage highlights examples such as the rallies in Tata Motors and Ashok Leyland, both of which were driven by positive earnings outlook, even as one-year forward Price-to-Earnings (PE) ratios contracted in 2023. Maruti and Samvardhana Motherson also saw over 85% of their stock gains attributed to strong earnings prospects. Similar trends were observed in TVS, Sona Blw, and Bajaj Auto.

The revival of the automotive sector can be attributed to increasing demand, improved profit margins, and a favorable product cycle for several companies, all of which have contributed to the recent outperformance of the Nifty Auto Index.

Between 2018 and 2021, the Nifty Auto Index had underperformed the broader Nifty50 by 74%, primarily due to regulatory cost pressures, financing challenges, and subsequent impacts from the COVID-19 pandemic and rising commodity prices. While the lag still stands at 54% since 2018 in comparison to the Nifty50, there are positive signs of recovery.

It’s worth noting that the 15-stock index had outperformed the Nifty50 for eight consecutive years between 2010 and 2017.

Stock Recommendations:

  1. TVS Motor: Buy | Target Price: Rs 1,750 (up from Rs 1,550)
  2. Tata Motors: Buy | Target Price: Rs 800
  3. Maruti Suzuki India (MSIL): Buy | Target Price: Rs 12,000 (up from Rs 11,500)

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