Automobiles Q1FY23 preview: Cost inflation remains amid easing of supply side issues; Ashok Leyland, Maruti Suzuki among 4 stocks to buy

Though demand recovery is underway for Automobiles sectors amid easing of supply side issues, the sector will continue to see cost inflation in 1QFY23, says brokerage. It will gradually mellow down from 2QFY23 onwards, it said.  

As per Motilal Oswal, the margins are likely to improve after three consecutive quarters' YoY decline in EBITDA.  

"After the last three quarters of YoY decline in EBITDA margins, we estimate margins to improve for MOFSL Auto Original Equipment Manufacturer (OEM) universe, driven by operating leverage, despite increase in RM cost," it said. 

However, it feels except HMCL and MM, all other OEMs are likely to report QoQ erosion in margins.  

It also revised FY23E EPS estimates for select companies to reflect commodity price/Fx changes, weakness in EU markets, and increase in interest rates.  

"We lower our FY23 estimates for TTMT (-12%), CEAT/APTY (-9%), and ENDU (-6%). We raise our estimates for HMCL (+10%), TVSL (7%), and MM/EIM (+5.5%)," said the brokerage. 

Motilal Oswal suggests focusing on companies with higher visibility in terms of demand recovery, a strong competitive positioning, margin drivers and a strong balance sheet.  

Based on these factors, it recommended Maruti Suzuki and Ashok Leyland as its OEM picks. Among auto component stocks, we prefer Motherson Sumi Wiring India (MSUMI) and TIINDIA (Tube Investments of India).  

Global brokerage Macquarie has retained an outperform stance on Maruti Suzuki with a target price of Rs 9110.  

Earlier, in its June auto round up, LKP Securities has maintained positive stance on the entire automobile sector.  

"We like Bajaj Auto as we believe the upcoming months to report good growth in domestic as well as exports on the back of recovery in the domestic markets, new launches and exports revival, especially in Africa and Latin America," it had said.  

It liked Hero on its domestic strength and TVS for its volume excellence and margin revival.  

On the PV side, it said MSIL is facing the supply side brunt more than others and is losing out on market share. However, its focus on CNG is yielding good results though it is delaying its EV plans, said LKP Securities. "With new launches coming up, huge order book and their EV plus Hybrid plans now in place, we believe the upcoming quarters to be quite good for MSIL," it added.  

It liked M&M for of its thrust on rural markets through its leadership 

From CVs space, it picked Ashok Leyland as it has a diversified revenue base deriving from LCVs, Defense, MHCVs and spares.  

On Tata Motors, it said the auto stock is seeing a strong PV business, along with a very healthy revival in CVs and improvement in JLR business.  

"Every dip in these stocks in the short term (driven by higher input costs, supply chain issues etc), shall provide good opportunities for investors to enter into them from medium to long term perspective," it added.