Could These 5 Auto Stocks Be Winners On Strong Demand Momentum?

The Sensex is finding it hard to stay above the 58,000 points level, with fresh selling emerging at higher levels. As interest rates move higher, there could be some pressure on stocks at higher levels. Here are 5 auto stocks that are on the preferred buy list of broking firm Sharekhan.

Automotive monthly sales to grow

According Automotive monthly sales (e-tractors) are expected to witness growth in April 2022, the brokerage has said. Commercial vehicles sales are expected to continue growing strongly, driven by increasing economic and infrastructure activities. The passenger vehicles wholesales according to Sharekhan are expected to improve, as supply constraints are easing. Tractor sales are expected to remain muted due to high base, while the two-wheeler (2W) segment is expected to recover, led by marriage season, improving rural sentiments and pentup demand. The wholesales of three-wheeler (3W) and bus segments are recovering, driven by opening of schools, offices and public transport. Exports continue to be a key growth driver for OEMs.

5 Preferred stocks to buy from broking firm Sharekhan

In the OEM space, Sharekhan prefers rural-centric companies with a strong balance sheet. In the two-wheeler space, it likes Bajaj Auto and Hero MotoCorp because of positive sentiments in rural and semi-urban areas, strong recovery in export destinations and comfortable valuations.

"In the tractor segment, we like M&M, given its leadership position in the tractor segment and its continued strong performance in other segments such as light commercial vehicles and utility vehicles. "We like Escorts as well in the tractor segment, as it is well-placed to benefit from a strong rural economy, rise in construction activity and partnership synergies with Kubota Corp. We like Tata Motors, led by recovery in commercial vehicles, passenger vehicles and JLR sales, while EVs (the key focus area) are expected to contribute 20% of domestic passenger vehicle sales over the next 5 years," Sharekhan has said.

Company name	Recommendation	Current market price	Target price
Bajaj Auto	Buy	3727	4800
HeroMoto Corp	Buy	2505	3210
M&M	Buy	924	1148
Escorts	Buy	1634	1075
Tata Motors	Buy	437	610

Auto sector remains a positive

Sharekhan remains positive on the sector despite near-term challenges and fear of COVID-19 related disruptions and a chips shortage. The passenger segment, both for 2W and four-wheelers, is expected to remain strong amid COVID-19, as preference for personal transport increases. Rural demand is expected to drive sales of tractors, farm equipment, and benefiting companies having a strong rural and semi-urban presence. We expect a sequential improvement in M&HCV sales to continue, driven by expected rise in e-Commerce, agriculture, infrastructure, and mining activities. "We expect recovery in the CV segment in FY2022E and FY2023E, driven by improved economic activities, low interest rate regime, and better financing availability. The bus and three-wheeler (3W) segments are expected to improve gradually, as corporate offices and educational institutions open. We stay Positive on the sector," the broking house has noted.

According to the brokerage any significant delay in recovery from COVID-19 infection or vaccination rollout continue to be a key risk going forward. Our forecasts can be impacted if semiconductor chips shortage situation aggravates.

Markets to remain volatile

Globally markets are witnessing volatility as investors remain concern over economic slowdown, lockdown in China, high inflation and potential aggressive US rate hikes, thus, keeping the bulls in check, according to Siddhartha Khemka, Head - Retail Research, Motilal Oswal Financial Services Ltd. "Investors would continue to monitor developments on the Russia-Ukraine war front and Russia's next move with regards its gas supplies to Europe. Back home, markets are reacting to earning releases. Nifty is holding well above 17,000 mark largely supported by Index heavyweight Reliance. Reliance Industries crossed market capitalisation milestone of $250 billion for the first time with shares hitting a record high on Thursday on the back of expectation of strong results. India VIX is trading in a range of 17-21 levels, indicating markets likely to remain in broader range in near term," he says.