Auto sector shows recovery signs after witnessing major headwinds; PV, CV in good space – Know what’s really driving the segment

The Auto sector commands a high beta, given its cyclical nature, which is reflected in the re-rating of the sector during an upcycle with an average of 24x over FY15-18 against 16x over FY09-14, said the domestic brokerage firm Motilal Oswal in its monthly Bull versus Bear report.

The valuation premium of the Auto sector over the Nifty has now widened to around 6 per cent as it is in the midst of a recovery. With multiple tailwinds in place, valuations for the Auto sector are still at a 14 per cent discount to its LPA (five-year) on a P/E basis, the brokerage said.

The visible signs of a recovery are seen in the Auto sector after witnessing major headwinds over the last three years, as there is a volume recovery across segments (except Tractors and 2Ws), with softening raw material costs aiding auto companies’ margins from H2FY23onwards, it added.

On a P/B basis, the Auto sector has seen a re-rating from the lows of April 21 and is now trading at a 10 per cent premium over its 10-year average of 3.1x, as RoE is now expected to improve to around 15 per cent in FY23E (from the lows of 11.8 per cent in FY21).

In Motilal Oswal’s base case, it expects a slower recovery for 2Ws and Tractors and a sustained recovery in PVs and CVs, and similarly, expects volume growth of 10/17/32/11 per cent for 2Ws/PVs/CVs/Tractors in FY23.

From a volume and margin recovery standpoint, the brokerage is in the mid-cycle phase of a recovery, with FY23 being the first full year of volume recovery and margin improvement.

Progress on the monsoons, which remained deficient in Jun 2022, remains key to a recovery in rural demand, the brokerage said, adding that the recent hikes in interest rates may act as a dampener on retail sales.