Amid EV threat, here are top auto stock picks by HDFC Securities

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As electric vehicles (EVs) are becoming mainstream, the institutional research team at HDFC Securities expects EV penetration to ramp up substantially with the increased subsidies from state and central governments over the past six months and improved product offerings.

“The terminal growth assumptions for 2W OEMs are at risk as the threat from EVs is more near term (over the next 3-5 years). Thus, the second stage DCF assumptions will potentially be impacted for the incumbents. Based on our sensitivity analysis of Hero , if we assume lower growth rates, the impact on the stock values will be between 15-25%,” the brokerage said in a note. 

HDFC Securities has downgraded Hero Moto and Endurance Tech stock to an ‘Add’ over the year and has a ‘Reduce’ recommendation on Eicher Motors. Within auto ancillaries, it prefers Bharat Forge due to its higher dependence on MHCVs, which are less likely to be impacted by EVs in the near/medium term. It also has a Buy on Tata Motors and Maruti.

The brokerage added that “Within 4Ws, due to the lower energy density of lithium ion batteries, we believe the heavy truck segment will continue to be powered by combustion engines in the near/medium term. We prefer 4W OEMs/ancillaries over 2Ws due to the impending shift.”

The battery technology is improving significantly to mitigate range anxiety to a large extent, especially when it comes to urban commute. Couple this with the scaling of charging infrastructure and we have highly promising factors, indicating a significant increase in EV adoption.

As EVs become mainstream, HDFC Securities said that the terminal growth assumptions for 2W OEMs are at risk as the threat from EVs is more near term (over the next 3-5 years). Thus, the second stage DCF assumptions will potentially be impacted for the incumbents.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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