Automobiles Sector Check - Demand Drivers Remain In Place: Motilal Oswal

Motilal Oswal Report

The auto sector clocked a healthy earnings growth of 96% YoY in FY24 backed by steady volume growth, improved mix, pricing discipline, and benign input costs. This is also reflected in the outperformance of the Auto index (by 45%) relative to Nifty over the last 12 months.

Apart from this, there have been sector-specific events that have driven the sub-sector outperformance relative to Nifty.

It is also now an established fact that the majority of easy gains in the Auto OEM stocks are now behind us, as we have witnessed significant volume growth across segments over the last two years, and input costs also appear to have bottomed out. Hence, one will have to make selective micro strategies to outperform from hereon. Against this backdrop, Maruti Suzuki is our top pick in auto OEMs as:

1. we expect it to continue outperforming the PV segment aided by new launches;

2. its improved mix will help margins sustain at elevated levels; and,

3. it could be the key beneficiary if the government decides to reduce GST on hybrid vehicles.

We also like Ashok Leyland as:

1. we anticipate a revival in CV demand by H2 FY25 after the near-term weakness; and

2. its valuations are attractive compared to peers.

We are also positive on Mahindra & Mahindra given:

1. the continued strong demand momentum in UVs; and

2. a likely revival in the tractor segment in FY25, after the corrected base in FY24.

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