Top Stock Picks: HDFC Securities Recommends These 3 Auto Stocks To Buy

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oi-Vipul Das

| Published: Wednesday, April 27, 2022, 9:43 [IST]

The brokerage firm HDFC Securities has picked up the auto sector and has given a buy rating on the shares of Hero MotoCorp (target price: Rs 2,825), Mahindra & Mahindra (target price: Rs 1,065), and TVS Motor (target price: Rs 778).

According to the brokerage “We expect auto demand (across segments) to revive on a low base relative to the peak of FY19, led by a pick-up in economic growth and expected rural revival. We factor in 17/16/18% volume CAGRs for 2Ws/PVs/CVs over FY22-24E. Key sectoral trends to watch out for include: (1) partial reversal in shift in mix towards premium-end vehicles as discretionary consumption from the average middle class consumer rebounds, with a pick-up in GDP; (2) EV penetration in scooters reaching 25% by FY25E and large OEMs emerging as dominant players; (3) current geopolitical conflict driving higher costs in the near term.”

“Given the sharp sector underperformance and expectation of a volume rebound, we believe the risk-reward would turn favorable for the sector. Our sector preference is 2Ws > PVs > CVs, largely based on valuation comfort. Hero MotoCorp, TVS, and M&M are our top picks amongst OEMs and Ashok Leyland is our top SELL,” the brokerage has claimed.

HDFC Securities has said that “Given the sharp sector underperformance and the expectation of a volume rebound, we expect the risk-reward to turn favourable for the sector. Our sector preference is: 2Ws > PVs > CVs, largely based on valuation comfort. Our top picks are Hero MotoCorp (BUY: volume revival + attractive valuation), TVS Motors (BUY: sustained outperformance), and M&M (BUY: mojo back in UVs). We also like Maruti Suzuki and Eicher Motors (both ADD; earnings growth to be driven by operating leverage). Our top SELL in the sector is Ashok Leyland (consensus earnings downgrade cycle likely to continue). We recommend trimming exposure on Tata Motors and Bajaj Auto (both REDUCE) as we believe most of the positives are already factored in.”

For the shares of Here Motocorp (HMC), the brokerage has highlighted that “We expect HMC to gradually recover its lost market share in motorcycles over the next 2-3 years, led by: (1) gradual picking up of the economy, which would drive consumption from the mid-to-low income consumers – a key segment for HMC and (2) expectation of a revival in rural economy. In the premium segment, HMC targets to double its market share to 10% in the coming years on the back of at least one launch a year over the next 3-4 years. Even in exports, HMC seems to have got its act right, having grown by 57% YoY in FY22, albeit on a low base; it targets to ramp up exports contribution to 15% of total sales in the next four years. Market share revival in domestic motorcycles and ramp-up in exports are likely to be key upside triggers for the stock. At 11.8x FY24 PER, the valuation is attractive. Initiate with a BUY and a TP of INR2,825/sh.”

Whereas for TVS Motor the brokerage has claimed “TVS has outperformed the industry in most of the segments it is present in: (1) it has gained 660bps market share in scooters over FY17-22; (2) it gained 700bps share in the 150-250cc motorcycle segment; (3) it has been outperforming in the exports segment for the last nine years. This outperformance has also brought about margin improvement, making it the only auto OEM that has achieved this feat in the last couple of years. Even in EVs, it seems to be ahead of its listed peers with a strong product pipeline in place over the next 24 months and has signed up with industry experts and JV partners to emerge a leading player in the industry. Initiate with a BUY and a TP of INR778/sh.”

With having a buy rating for Mahindra & Mahindra, HDFC Securities has also claimed that “We remain optimistic about M&M’s aggressive future road map for its core auto and FES segments (target of 15-20% growth CAGR over 2025), as well as the company’s focus on achieving 18% RoCE. Following a correction in FY22, we expect the domestic tractor industry to grow volumes by 8% YoY in FY23, owing to positive rural sentiment. Thanks to an ambitious launch pipeline via the K2 platform, we expect M&M to maintain its tractor category leadership, going forward. M&M’s new UV models are currently seeing healthy demand in the UV market. Also, given a solid product pipeline, we expect M&M to regain some of its lost market share in the coming years. Following its restructuring, the performance of its international subsidiaries has sharply improved, with the results clearly visible for last few quarters. M&M may also try to unlock value from its “Growth Gems” in the future. Initiate with a BUY and a TP of INR1,065/sh.”

Company Recommendation Target Price in Rs
Ashok Leyland SELL 96
Bajaj Auto REDUCE 3,489
Eicher Motors ADD 2,839
Hero MotoCorp BUY 2,825
Maruti Suzuki ADD 8,412
Mahindra & Mahindra BUY 1,065
TVS Motor Co BUY 778
Tata Motors REDUCE 441
Source: Data as of 26 April 2022
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Story first published: Wednesday, April 27, 2022, 9:43 [IST]