Auto stocks have been on a roll over the last few quarters in line with the Sensex, Nifty and the broader markets. Select autos stocks are available at a discount to their long term price to earnings multiple. Let us tell you whether they are worthy picks.
Auto stocks that are available at a discount in terms of 10-year p/e averages
|p/e current||10-year average p/e||Discount|
(Courtesy: Bulls & Bears India Valuation Handbook, Motilal Oswal Financial Services)
Just because a stock is at a discount, does not make it a good pick by default. There could be many challenges for such companies including management issues, growth issues or other promoter related problems. Each company needs to be analyzed in detail for the same.
Should you buy Mahindra CIE, Motherson Sumi, HeroMoto Corp and Bosch shares?
The auto sector is trading at a P/E of 22.5 times, at a 5.3% premium to its historical average of 21.4x, Bulls & Bears India Valuation Handbook, Motilal Oswal Financial Services.
To begin with several brokerages are optimistic on the stock of Mahindra CIE. Emkay Global and Motilal Oswal had a buy on the stock, with a price target of Rs 280 and Rs 295. With the stock now at Rs 269, there is very limited scope for appreciation. Therefore, this many not necessarily be attractive given the upward momentum over the last 2-months.
Motherson Sumi is one stock that brokerages are bullish on. Emkay Global believes that the stock can rise 37% from the current levels of Rs 236 to a price of Rs 325.
According to Emkay Global revenues of the company are likely to witness growth at +5% on a CAGR basis. "On quarter-to-quarter basis, revenues should increase by 5% due to growth in automobile production in Europe and US PV segments. EBITDA margin should expand to 10.3% from 6.8% in Q1FY20," Emkay Global has said.
According to the brokerage, the margin is likely to expand by 10 basis points qoq due to higher scale.
Hero MotoCorp stock remains overvalued
HeroMoto Corp is another stock that could have made an interesting pick, had the stock been lower from the current levels. The shares have moved-up steadily over the last 6-9 months and the price is no longer attractive. Bulls & Bears India Valuation Handbook, Motilal Oswal Financial Services, says that 2 wheeler will recover slower, which means investors will need patience in stocks like HeroMoto Corp.
In fact, the entire sector is trading at a premium, which makes stocks from the sector unattractive. "On a P/B basis, the sector is trading at a 5% premium over its 10-year average of 3 times," Bulls & Bears India Valuation Handbook, Motilal Oswal Financial Services.
In short, the sector is over valued, not many shares are available at a discount and those that are, do not look too attractive. Motherson Sumi Systems a global auto ancillary player may still have some steam left in the stock.
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