Automobiles Sector Check – Positive Triggers Priced In; Growth To Moderate All Across: ICICI Securities

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Post outperforming benchmark Nifty 50 by ~10% in the past six months, India auto index (Nifty Auto), we believe, has limited upside triggers left from a six month perspective. We expect volume growth moderation across passenger vehicles, commercial vehicles, two-wheelers and tractors in FY24 along with benefits of reduction in raw material basket cost being fully priced in.

Thus, with majority of companies trading at the higher end of valuation cycle with limited scope of upgrades, both in terms of volume and profitability, the space needs consolidation from a six-12 month perspective, we believe.

Post domestic wholesales of passenger vehicles/goods medium and heavy commercial vehicles/two-wheelers grew by 27%/49%/19% in FY23, we expect growth to moderate to ~8%/~10%/~12%, respectively, in FY24 based on our assessment of industry cycles, consumer sentiment and new launch pipeline.

Key input commodity prices of aluminium, copper, steel have remained steady in trailing six months, thus, leaving limited upside for profitability improvement with benefit from operating leverage also to come down amidst lower growth.

We are not changing FY24/25 estimates for any auto original equipment manufacturer and rollover our target price(s) to Q2 FY24.

Our top picks in the space from a long term compounding perspective are Mahindra and Mahindra Ltd. and TVS Motor Company Ltd. with Tata Motors Ltd. being preferred tactical trade to play the commercial vehicle cycle.

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