Emkay, Motilal Recommends A Buy On 2 Large Cap Auto Stocks

Motilal Oswal and Emkay Global Financial, both have given a "buy" view on two large cap auto stocks. Maruti Suzuki and TVS Motors posted their quarterly results which have nearly surpassed the estimates of the stock broking firms.

Maruti Suzuki India Ltd: Robust performance led by Volume

Maruti Suzuki results shared, show an uptick in volume by 8% to 465,911 units and Realization grew by 15% to Rs623,387/unit. Gross margin grew by 260 basis point (bps) year-on-year (yoy), on account of better net pricing, improved mix and favourable currency movement.

Further, lower other costs led to EBITDA margin expansion of 310bp yoy (up 50bp qoq) to 9.8% (vs est 9.6%). EBIT margins were at 7.3% (vs est 6.9%, up 330bp yoy). Higher other income led to PAT beat with PAT growing 2.3x yoy to ~Rs 23.5b (vs est ~Rs 17.7b).

The company has strong order book of nearly 363,000 units, which includes 119,000 new products that can drive future sales. Also, note a large part of the commodity cost benefit is already realized by 3QFY23, was informed by the management.

Motilal Oswal's view:

- Good demand and favorable product life cycle for MSIL augur well for market share and margins. We expect a recovery in both market share and margins in FY24, led by an improvement in supplies, favourable product life cycle, mix and operating leverage.

- The stock trades at 23.7x/20x FY23E/FY24E consolidated EPS. We lower our target PE multiple to 25x from 27x, as we lower our estimated market share for MSIL. We reiterate our Buy rating with a TP of Rs 10,500.

Emkay Financial Services view:

- Driven by better scale and pricing, we expect EBITDA margin to expand, from 6.5% in FY22 to 9.3% in FY23E and to 11.3% in FY25E. We increase FY23E EPS by 7% to Rs263 on higher margin and other income assumptions, and slightly nudge up the FY24E/25E EPS by 1% to Rs380/Rs428. We retain BUY with TP of Rs10,700/share (from Rs10,500), based on 27x core P/E on FY25E EPS.

TVS Motors: Flat volumes yet good gross margin expansion

TVSL's 3QFY23 operating performance was in line, driven by higher ASPs despite flat volumes at 879,423 units, while Realization grew by 15% to Rs74,429/unit. Gross margins expanded by 80bp ypy/70 bp qoq to 24.5% (v/s est. 24.7%), aided by the softening of RM costs (30bp qoq), forex and mix. However, operating de-leverage led to flat EBITDA margins. Adjusted PAT stood at Rs 3.5b (v/s est. Rs3.4b), up 22% yoy.

Retail sales have been ahead of wholesales in most of the markets; however, there are some green shoots visible in 4Q. Its major market Africa is affected by forex and inflationary pressures. Inventory stands at 30-35 days over and above transit inventory.

In EV segment iQube is ramping up well, with 3QFY23 wholesales at ~29k units (v/s 16k units in 2QFY23). TVSL plans to double volumes in 4QFY23. As per Vahan, its market share in EV is 14.5%. It has an order book of 25k scooters. TVSL plans to launch new products over the next 12-18 months and expand to new cities as production ramps up (currently in 100-110 cities).

Motilal Oswal's view:

- Volume growth is likely to be driven by a recovery in the domestic 2W market, new products (Raider and iQube) and a recovery in exports. TVSL is enjoying the benefits of economies of scale and operating leverage, resulting in consistent double-digit EBITDA margin. However, TVSL earns ~40% of its overall EBITDA from the domestic scooter business, making it vulnerable to EV disruption. Valuations at 23.3x/20.0x FY24E/FY25E EPS largely reflect its strong earnings growth, as well as an increasing risk of EVs.

Emkay Financial Services view:

We maintain our positive stance on the stock, underpinned by: 1) expectations of a cyclical upturn in domestic 2Ws which generally lasts for at least 3 years; 2) increasing focus on EVs and premium models; and 3) market-share gains in the domestic & overseas markets. We reaffirm BUY with TP of Rs1,220/share.

Disclaimer

The stocks have been picked from the brokerage report of Emkay Global Financial Services and Motilal Oswal. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to consult with certified experts before making any investment decision.