Tata Motors, Bajaj Auto: Near-term headwinds may keep auto shares volatile

Shares of auto and auto-ancillary companies entered fast-lane on Monday after auto-makers posted in-line December sales figures over the weekend.

Shares of Tube Investments of India, for instance, surged over 8 per cent intra-day while those of Eicher Motors, Ashok Leyland, Tata Motors, Bharat Forge, Maruti Suzuki India, and Bajaj Auto gained between 1 and 5 per cent. Exide Industries, Bosch, Hero MotoCorp, and MRF, too, gained up to 0.9 per cent.

The sector, especially two-wheeler makers, however, may not be entirely out of the woods yet and could have a bumpy road ahead, caution analysts, as increasing price hikes, and rising fuel costs could limit consumer spending.

According to Harsh Patidar, auto analyst at CapitalVia Global Research, headwinds such as semiconductor shortage, surge in Covid-19 cases, and other supply chain disruptions continue to persist for the sector which might affect overall sentiment.

"Passenger vehicle (PV) original equipment manufacturers' (OEMs') attempt to catch up to the demand for popular models was impacted by production cuts, while entry-level demand trends across two-wheelers and PVs have remained weak. Going-forward, increasing price hikes (~8-10 per cent across segments since Jan'21) and rising fuel costs could limit consumer wallet spends at the entry level," said Basudeb Banerjee and Pratit Vjani, research analysts at ICICI Securities.

Hero Motocorp and Royal Enfield (by Eicher Motors) reported a 13 per cent and 43 per cent monthly increase, respectively, in total sales while TVS Motors’ sales slipped 8 per cent.

Among OEMs, Maruti Suzuki’s despatches rose 10 per cent MoM (down 4 per cent YoY); and Mahindra & Mahindra’s PV volumes fell 9 per cent MoM with utility vehicle (UV) segment reporting a decline of 10 per cent. Tata Motors, on the contrary, saw a 50 per cent YoY growth.

"The two wheelers continued to perform weak in December, while the PVs are responding well to the strong demand despite chip shortage issues continuing. The rural markets are still badly impacted, post the second Covid wave, and are taking more time to recover than expected. Rising number of Omicron cases are imposing curbs in several states which are impacting demand and may impact further," points out Ashwin Patil, senior research analyst at LKP Securities.

On the PV front, he says, most of the OEMs are facing scarcity of semiconductor chips, which is the case even in sports and premium segments of two-wheelers.

However, despite this chip crunch, some of the PVs have managed to post good numbers catering to the encouraging demand, he adds.

Going ahead, analysts at Motilal Oswal Financial Services see easing semiconductor supplies supporting PV wholesales, but the two-wheeler segment will take time to recover.

The brokerage expects the momentum in the commercial vehicle (CV) cycle to continue and prefers companies with a higher visibility in terms of a demand recovery, a strong competitive positioning, margin drivers, and balance sheet strength.

Its top picks include Maruti Suzuki and Ashok Leyland among OEMs; Bharat Forge and Apollo Tyres among auto-component stocks; and Tata Motors as a play on a global PV recovery.

For Patil of LKP Securities, overall FY22 show could be decent on a very low base of H1FY21.

"Two-wheelers and tractors may post a mid-single digit growth in FY22, while PVs and CVs are expected to grow close to 10 per cent and 20-25 per cent, respectively. Therefore, FY22 is expected to be better than FY21, provided the impact of Omicron is not huge," he says.

Individually, he prefers Bajaj Auto as its growth is well driven by exports and three-wheelers, while he likes M&M due to its thrust on rural markets through its leadership in tractors business, prudent capital allocation, and a robust growth strategy in UVs, electric vehicles (EVs) and CVs.

He also likes Ashok Leyland within CVs and Tata Motors on the back of a very healthy revival in MHCVs and improvement in JLR business.

Every dip in these stocks, he says, could be utilized to enter from a medium-to-long term perspective.