Wild ride for auto stocks in markets so far in FY24 as they burn rubber

Full-throttle performance driven by product premiumisation across vehicle manufacturers

Automotive (auto) and auto ancillary stocks have been in the fast lane thus far in 2023–24 (FY24), with the National Stock Exchange Nifty Auto Index surging nearly 27 per cent, outperforming the Nifty50, which has gained roughly 11 per cent during this period.

The top-gear performance of auto stocks at the bourses, according to A K Prabhakar, head of research at IDBI Capital, has been triggered by the premiumisation of products across vehicle manufacturers, which has seen vehicle sales remaining relatively stable.
 

“It is not about higher sales figures now, but about premiumisation. The highest sales are now in the premium or high-end category across most manufacturers, which the markets like. Tata Motors is the leader in the electric vehicle (EV) space, and Mahindra & Mahindra (M&M) is one of the leaders in the sport utility vehicle (SUV) category. Maruti Suzuki India (MSIL), too, has launched the Invicto, its most expensive SUV to date. Even in the two-wheeler (2W) category, Hero MotoCorp (Hero Moto) and Bajaj Auto are launching high-end products, which are being interpreted positively by the markets,” says Prabhakar.

Auto retail sales in June, according to data released by the Federation of Automobile Dealers Associations of India (Fada) recently, registered a 10 per cent year-on-year growth at 1,863,868 units across segments. On a month-on-month basis, however, sales came in 8 per cent lower.
 

“The July 2023 auto retail outlook signals mixed trends. The 2W market anticipates continued supply challenges and economic pressures, notwithstanding new schemes and expectations of monsoon-bolstered sentiment. Meanwhile, the cutback in the Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles subsidies casts a shadow on EV sales. Conversely, the three-wheeler market predicts growth, underpinned by favourable market responses and rising demand,” states FADA in a release.
 

At the bourses, meanwhile, the stocks have been burning rubber. Tata Motors, Samvardhana Motherson International, and Hero Moto have zoomed up to 47 per cent thus far in FY24, reveals data. Among the 15 auto and auto ancillary stocks that comprise the Nifty Auto, as many as eight stocks hit their respective 52-week highs in the first week of July 2023. MSIL breached the Rs. 10,000 mark for the first time ever last week.

Alternatively, Tata Motors hit an all-time high of Rs. 609.3 in Friday’s intraday trade after more than eight years. It surpassed its previous high of Rs. 606 it had touched on February 3, 2015.
 

The road ahead
 

Prabhakar expects the rally in most auto stocks to sustain, but suggests investors remain selective and not buy simply to ride the momentum.
 

“A lot of auto stocks have not rallied in the past five/six years but still have steam left. MSIL can easily move up another 15–20 per cent. M&M can move beyond Rs. 1,800 levels. I am not very gung-ho on Hero Moto and Eicher Motors (Eicher), although Eicher can be bought at lower levels from a long-term perspective. I am bullish on the auto ancillary space,” he adds.

In the 2W segment, the entry of the Triumph and Harley-Davidson, with India-specific models at attractive pricing, according to analysts at BNP Paribas, offers the desired choices to customers.
 

“We think this will lead to quicker premiumisation of the 2W industry. While we expect Royal Enfield (Enfield) to remain the dominant player in the segment, recent launches should lead to increased competitive intensity and some market share redistribution away from Enfield,” writes Kumar Rakesh, an analyst tracking the sector at BNP Paribas. He has a target of Rs. 4,550 for Bajaj Auto, Rs. 3,500 for Eicher, and Rs. 2,390 for Hero Moto stocks.

Analysts at Jefferies, too, believe that the Indian 2W industry is ripe for strong recovery from an abnormal cyclical trough. They expect industry volumes to rise at an 18 per cent compound annual growth rate (CAGR) in 2022-23 through 2024-25 estimates. They expect Bajaj Auto’s volumes and earnings per share to grow at a15 per cent and 23 per cent CAGR, respectively, over this period.