The demand sentiments for 2Ws have improved in 1HFY24 aided by strong show in urban pockets while rural markets are also showing signs of recovery. New model launches, improved supplies and lower base of previous year should drive a 9-11% volume CAGR over FY23-26E, Motilal said.
With its stronghold in the 100cc motorcycle segment, Hero is a good proxy in a rural market recovery, Motilal said. It also deemed Endurance as a proxy play to the domestic 2W industry while selecting Craftsman with expectations of strong growth and superior capital efficiency.
The domestic brokerage also maintains a positive view on MHCVs (medium and heavy commercial vehicles) and anticipates MHCV volumes to register a CAGR of 7-9% from FY23 to FY26E. “This keeps MHCVs as our second choice within the auto pack,” the brokerage note said.
The brokerage has turned cautious on passenger vehicle growth outlook due to a slowdown in demand trend and high base while putting LCVs (light commercial vehicles) and tractors at the bottom of the pecking order. Even though tractors reported their highest volumes in FY23, Motilal estimates minimal space for growth in both LCV and tractors over the next three years, with expected CAGRs for both ranging 3-5%.
Benign commodity prices in Q2FY24 gave a much-needed tailwind to the auto stocks leading to better September quarter margins. It was on the back of a sharp increase in raw material prices in the April-June quarter. “Commodities such as steel/aluminum/rubber/polymer have corrected 10-25% from their peaks,” Motial noted.
Going ahead, mix and operating leverage will likely play a key role in driving margins, this brokerage said citing trends in 2Ws and PVs. In the former case, mix for >125CC models has increased from 30% in FY22 to 33% in 2QFY24 while in the latter’s case SUV mix has increased from 45% in FY22 to 53% in 2QFY24.While the absolute capex is expected to increase over the next three years, there will be a climb down in capex intensity, which will be significantly lower than the revenue growth — another positive listed by Motilal. This will further lead to a healthy free cash flow (FCF) for most companies.
Preferred Picks
Hero MotoCorp: Buy | Target: Rs 3,850 | Upside: 13%
Endurance: Buy | Target: Rs 2,000 | Upside: 26%
Craftsman Automation: Buy | Rs 5,800 | Upside: 12%
Tata Motors: Buy | Target: Rs 750 | Upside: 10%
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)