GR Exclusive: Autos May Log Low -To-Mid-Single-Digit Volume Growth In 2024; 3 Dividend Stocks Top Picks

The automobile sector's outlook in 2024 is influenced by a host of key factors. Overall, the industry is likely to post low-to-mid-single-digit growth in volumes, while raw material costs which have been a spoilsport and pushed these auto giants to hike their prices, may softness in 2024. Also, OEMs are likely to focus on profitability and premiumization, while ancillary players may aim to bolster content per vehicle. That being said, Dhruv Mudaraddi, Research Analyst, StoxBox has recommended buying three stocks which are also among the hefty dividend-paying ones in 2023.

In an exclusive with GoodReturns.In, Dhruv Mudaraddi, Research Analyst, StoxBox said that in FY24, the automobile sector demonstrated a commendable operating performance that aligned more or less with expectations.

He highlighted that despite contending with a high base for volumes and fluctuations in metal prices, the sector's strategic focus on premiumization, rising value addition, and a favourable trend in raw material costs is poised to contribute significantly to operational excellence.

With the industry setting its sights on the remainder of the fiscal year, Mudaraddi anticipates that the bottom-line performance in H2FY24 will be predominantly driven by an expansion in EBITDA margins rather than an emphasis on volume growth.

What to expect in 2024?

In 2024, the analyst said that the outlook is characterized by a multifaceted landscape, encompassing challenges, resilience, and strategic responses to market dynamics.

Further, he said that the sector outlook remains optimistic, leveraging innovative approaches and a proactive stance towards emerging trends. The preferred picks align with companies demonstrating adaptability, innovation, and a strategic vision to navigate the complex dynamics of the evolving automotive industry.

Explaining in detail, Mudaraddi said that key expectations include softness in raw material costs, the effective pass-on of higher input costs, and in-house cost correction measures supporting operational performance. OEMs are anticipated to prioritize profitability and premiumization, while ancillary players aim to bolster content per vehicle, signifying a concerted effort towards enhancing the overall value.

"While the outlook for the overall automobile sector indicates low to mid-single-digit volume growth across most segments in FY25, the small car segment faces challenges, contributing to an overall growth rate that hovers near stagnation," he added.

Also, according to the analyst, the projections for the aftermarket business are optimistic, with expectations of better performance in the latter half of FY24 driven by a gradual recovery, and profitable growth in FY25 led by increasing content per vehicle in EVs and ICE models and increasing prices of products due to regulatory changes.

Following this, Stoxbox analyst's preferred picks in 2024 are:

Ashok Leyland:

A prominent player in the MHCV industry has reported a noteworthy 10% YoY growth in the first half of FY24, with demand spanning various sectors. The bus segment exhibits robust demand, while a pickup in Light Commercial Vehicles (LCVs) is anticipated in H2FY24.

Mudaraddi added, "We expect softening in steel prices and ongoing internal cost rationalization measures to contribute to margin improvement going forward. Ashok Leyland is set to transition to the new tax regime from FY25, with a planned capital expenditure of approximately Rs. 600 crores for FY24. The defence sector is poised to generate revenue of Rs 800-1000 crores in FY24, supported by a robust order pipeline for the upcoming years. Notably, the Board of Directors has sanctioned an investment of Rs 1,200 crores in Switch Mobility, with 1,200 electric bus orders and 10,000 electric LCVs Letters of Intent (LOIs) in hand."

Hero MotoCorp:

The company expects positive post-festival demand as the marriage season kicks in, with a focus on premium motorcycles and scooters in upcoming launches. The X440 has garnered an order book exceeding 25,000 units, with delivery scheduled within four months. Exports exhibit sequential growth, and the company plans to scale up volumes in the second half of FY24. Regarding EVs, Hero is actively working on establishing the necessary infrastructure in FY24, with new launches slated for FY25, emphasizing an affordable product portfolio.

The analyst expects operating leverage to manifest as we move ahead, with the company's focus on premium launches, EVs, digital initiatives, etc. The projected capex for FY24 is approximately Rs. 1,000 crores, primarily directed towards EVs and premiumization.

Minda Corporation:

The company is a leading automotive component supplier catering to all key segments of PV, 2Ws, CVs and tractors with a diversified product portfolio. Minda is the best proxy to play in 2-wheeler sales which is currently doing extremely well. The company has received lifetime orders worth Rs. 7,700 crores of which 46% came from replacement business and 54% came from new business.

The analyst feels that with such a strong order book and all EV-ready products, the company can easily grow above 20% for the next 3-5 years. The company is continuously working on products that are expected to have 3-4x content value compared to traditional products. The management has also guided for 20% revenue CAGR, with margins also inching upwards to 13% from the current 11%. He added, "With the stock available at 7% cash flow yield on FY25e with ROE of 20% and having great growth prospects, we expect the company to do well from a one-year perspective."

In 2023, Ashok Leyland paid dividends up to 260% amounting to Rs 2.6 per share. While Minda Corporation paid up 60% dividends valuing to Rs 1.2 per share in the year. However, among the three, Hero MotoCorp paid the highest dividend of 5000% amounting to Rs 100 per share.

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author or Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.