ICICI Sec. Recommends 4 Auto Stocks To Buy As BSE Auto Outperforms Benchmark By 18% YTD

Demand scenario in Q1Fy23

Demand scenario across segments in the auto space increased sequentially despite a seasonally weak quarter. This includes traction seen even in the case of M&HCVs. This in fact aided operating leverage.

Gross margin reversal expected from Q2Fy23

Gross margins for the sector took a hit especially for the 4W OEMs owing to the peak costs of input commodities. Consequently EBITDA margin saw a squeeze for all of the 4W OEMs sequentially. Also, 2W companies retained their margin QoQ. "Raw
material basket (RMB) costs have largely stabilised in Q2 post around 15-20% decline in May-June from its March-April highs. Thus gradual price hikes in Q2 and lagged effect of lowering of RMB costs would start aiding gross margin reversal from Q2, with a steady scale. We expect retail demand in Q2 to remain steady across segments QoQ, with weak-seasonality-impacted volumes in July/August to get mitigated by strong demand in the pre-festive month of September", notes the brokerage.

"We believe, Maruti Suzuki, Bajaj Auto, TVS
Motors, and Eicher Motors would also benefit from the favourable currency moves in past three months, aiding their margins in Q2. In Q1, 2W EBITDAM remained flat QoQ vs 4W margin falling by around 300bps", adds the brokerage.

Expect wholesales to remain largely flat QoQ in Q2 with a strong September to compensate a weak July

With chip supply improving, inventory levels being under control and range-bound retail demand in the seasonally weak months of June- August, we expect a strong September would keep QoQ wholesale volumes flat. With the premiumisation trend continuing driven by fresh SUVs and 350cc bike launches attracting robust demand, we concur with the consumer confidence factor driven retail demand in the personal mobility segments of PV/2Ws.

M&HCV retails continued to show immense resilience in the rainy season, clocking weekly levels of
around 5.5k units, aided by bus demand gradually recovering post covid. The comforting factor is that dealer inventory levels across segments are reasonably under control, with scope for pre-festive stocking up in coming weeks.

Valuations and risk: With auto index outperforming by ~18% in CY22-TD, valuation multiples of several auto OEMs have reached upcycle levels, leaving little scope for further rerating beyond our implied target multiples. With limited triggers for further
earnings upgrades and rerating, we downgrade Bajaj Auto to REDUCE (from Hold) and Eicher Motors to ADD (from Buy).

Key upside risks

Higher than anticipated decline in input commodity prices, crude oil price falling below US$80/bbl, rural consumption trend recovering.

Key downside risks

Continued pressure on semiconductor chip supply, geopolitical situation worsening, input commodity prices
inching up again, crude oil prices going back above US$120/bbl.

Auto stocks outlook

Disclaimer

The stock recommendations on the auto scrips are as taken from the sector update report by ICICI Securities. Readers should not misinterpret the report as an investment advice into the above stocks.