Auto companies are witnessing strong traction post the lockdown and with it, the stocks can generate solid returns over the medium to longer term.
According to brokerage firm Motilal Oswal, volume recovery in 2QFY21 was stronger than anticipated, with the continued benefit of demand recovery, improvement in supply chain, and inventory buildup for the festive season.
"While volumes for Tractors are growing on a YoY basis, two-wheelers and passenger vehicle volumes are at 90- 110% of last year's levels.
Light Commercial vehicles has also recovered to 70-80% of last year's levels, whereas Medium and Heavy Commercial Vehicles stands 40-50% lower YoY. The EBITDA margin for our OEM (ex-JLR) universe is likely to expand 60bp YoY to 10.9% (v/s -4% in 1Q), led by good recovery in margins for mainstream two-wheelers, Tractors, and MSIL.
"We have increased our FY22E EPS estimates for almost all of the companies under our coverage," the brokerage firm has stated.
Top two auto stock picks
Brokerage firm Motilal Oswal has kept Mahindra and Mahindra and HeroMoto Corp as its top picks from the OEM space.
The brokerage firm has kept in mind, higher visibility in terms of demand recovery, a strong competitive positioning, margin drivers, and balance sheet strength before short listing these companies.
a) HeroMoto Corp
Motilal Oswal has set 24 per cent returns from the stock price of HeroMoto Corp as against the current market price of Rs 3,152
Better demand recovery due to strong entry-level portfolio and robust rural recovery are among the major reasons that the broking firm has initiated a "buy" on HeroMoto Corp. The broking firm Also sees strong operating margin due to volume recovery.
b) Mahindra and Mahindra
Motilal Oswal estimates that the Mahindra and Mahindra stock can generate an upside potential of 26 per cent.
"Strong growth in Tractors to drive mix and margins. The LCV segment recovering faster than expected and SUV business recovering, but lagging behind underlying industry," the broking firm has said.
According to it the EPS upgrade takes into to account for strong growth in tractors.
The broking firm has revised its sales estimates for Mahindra and Mahindra and HeroMotor Corp, along with others.
|FY 2020-21 (revised)||Old (FY 2020-21)|
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