Top Pick 2023: Motilal Oswal Picks This Midcap Automobile Stock, Recommends Buy For 35% Returns

Leading brokerage firm Motilal Oswal Picks Samvardhana Motherson International Limited (MOTHERSO) as its top pick for 2023. The brokerage recommends sees robust 35% returns on investments with a target price of Rs 95 per share. With a market capitalisation of Rs 31,894.36 crore, it is a mid-cap financial sector stock.

Stock Outlook & Returns

On NSE, the stock's current market price of the stock is Rs 70.55 per share, up 1.51% from its previous close of Rs 69.50 per share. The stock recorded its 52 week high on 12 January 2022 at rs 169.30/share and its 52 week low level is Rs 61.80/share recorded on 25 October 2022.

The stock in the past 1 week has fallen 2.28%. It gave 1.26% in the past 1 month. In the past 3 months it gave 15.12% positive returns. It gave 30.77% negative returns in the past 1 year. In the past 3 and 5 years, it has given negative returns of 3.49% and 43.47%, respectively.

A big beneficiary of global mega trends in automotive industry

The last two to three years had been tough for MOTHERSO as it was adversely impacted by company-specific issues followed by tough operating environment, resulting in the stock underperforming the NSE Auto Index by 62%/72.5% over 1 year/3 years. However, we believe the worst is behind and operating performance should start recovering, led by improving supply-side issues and stable costs. With large part of investments already done, improving operating performance would drive down financial gearing as well.

Global production recovery underway...

The last two years have witnessed a series of disruptions, leading to a ~17% fall in global light vehicle production in CY21 over CY19 and a 22% drop in US Class 8 production. However, the supply chain is now gradually regaining its normalcy, as reflected in global PV production growth of ~28% YoY/11% QoQ in 2QFY23 and growth in CV production across markets (excluding China). Demand continues to be strong, resulting in expansion in the order backlogs. This coupled with substantially lower channel inventory lends medium-term visibility for demand.

...MOTHERSO well positioned to benefit from OEM production recovery...

After weathering the storm over the last two to three years, it would see the tide turning as OEM production benefits from improving supplies. The initial signs of recovery were visible in all the global businesses in 2QFY23 (in seasonally weakest quarter). We expect good growth across global businesses viz SMR (+17% CAGR over FY22-25E), SMP (+11% CAGR), and PKC (+5.6% CAGR), despite factoring in for the impact of commodity cost deflation. This recovery would be supported by the strong order book for SMRPBV, which has continued to grow to EUR18.2b in 2QFY23 from EUR13.6b in 4QFY20.

...as well as strong content increase, led by mega-trends in auto industry

MOTHERSO's businesses are expected to benefit substantially from the mega-trends being witnessed in the global automotive industry. Content increase would be an important driver of growth for MOTHERO, leading to stronger than the underlying industry growth. This will be driven by trends such as premiumization (increase by 10% to 200% across businesses), rising SUV mix (by 50% to 200% increase), and electrification (40% to over 7x increase).

Expect strong financial recovery, led by normalization of production

With improvement in supply-side issues (driving operating leverage) and correction in key commodity prices, we expect sharp recovery in profitability for key businesses. At a consolidated level, we estimate net sales/EBITDA/PAT to register a 10%/21.5%/63% CAGR over FY22-25E.

Valuation & view

The stock trades at reasonable valuations at 17.5x/13.1x FY24E/FY25E consolidated EPS. "With high operating leverage, reasonable financial gearing and no risk of EVs, MOTHERSO is our preferred pick in the auto component industry. We reiterate our Buy rating with a TP of INR95 (Sep-24 based SOTP)," the brokerage has said.

 

Disclaimer

The stock has been picked from the brokerage report of 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.