6 Auto And Auto-Ancillary Stocks To Bet As Economy Recovers

Emkay Global Financial Services has come up with its latest research report on the Auto sector. The broking firm believes that amid a healthy recovery, rising commodity price inflation has caused automobile prices to rise.

The firms top picks among OEMs include Tata Motors (target price :Rs375), Ashok Leyland (target price: Rs155), Maruti Suzuki (target price :Rs 9,000) and Eicher Motors (target price: Rs 3,300). In Ancillaries, Emkay Global likes Bharat Forge (target price: Rs 760) and Apollo Tyres (target price: Rs306).

"In the last three quarters, net price increases, factoring in discounts, stood at 4-5% across segments, with another 2% increase expected in Q1FY22. OEMs expect price increases to cover a major chunk of commodity inflation, and the rest will be gradually offset through cost savings and better mix.

Historically, in the auto market, there is a poor inverse correlation between price increases and volume growth as there are other factors influencing demand, such as economic growth, customer sentiment and interest rates. Our recent channel checks indicate that price increases have not significantly impacted demand across segments, except for the demand pressure seen in entry-level 2Ws," the Emkay research report says.

According to it, the impact of price increases has been partly neutralized by tapering interest rates and some shift toward longer-tenure loans.

"Let's take the example of best-selling models: for Maruti Baleno hatchback, in the last two years, monthly EMIs have increased by only Rs450 to Rs11,100 for a five-year loan, and for Hero Splendor motorcycle, EMIs have increased by Rs230 to Rs1,500 for a four-year loan. Monthly EMIs can reduce by 13-14% by increasing loan tenures by one year.

The impact of price increases has been partly neutralized by tapering interest rates and some shift toward longer-tenure loans. Let's take the example of best-selling models: for Maruti Baleno hatchback, in the last two years, monthly EMIs have increased by only ~Rs450 to Rs11,100 for a five-year loan, and for Hero Splendor motorcycle, EMIs have increased by ~Rs230 to Rs1,500 for a four-year loan. Monthly EMIs can reduce by 13-14% by increasing loan tenures by one year.

We expect demand growth to be robust across segments in FY22E, with 86% growth in MHCVs, 29% in PVs and 19% in 2Ws, aided by improving macros, long-overdue replacement cycle, low interest rates, improving finance availability and favorable base effect," the broking firm has stated.

According to the broking firm, there has always been a reasonable inverse correlation between commodity price inflation and margins for automakers, due to the lagged effect of price increases.

"Gross margins were impacted in Q3FY21 and the pressure on margins is expected to continue in Q4FY21 as well.

"Our positive view on the Automobile sector is underpinned by expectations of a strong cyclical upturn, which is expected to last for at least three years," the broking firm has states.

Disclaimer:

Greynium Information Technologies Pvt Ltd, its subsidiaries, associates and authors do not accept culpability for losses and/or damages arising based on information in this article. The article is for information purposes only.