Tata Motors, Maruti Suzuki, TVS Motor: Why Jefferies sees up to 40% upside in auto stocks

Foreign brokerage Jefferies is bullish on the domestic auto sector, thanks to positive demand and margin and, hence, earnings cycle. In its latest note on the sector, Jefferies said most auto stocks are trading near or below their respective last 10-year average PE, based on its FY24 estimates.

It sees a healthy 11-18 per cent volume growth for passenger vehicles (PVs), two wheelers and trucks compounded annually over FY23-25E, with two-wheeler growth outpacing four wheelers'.

The brokerage feels that strong top-line growth and better margins should fuel double-digit EPS CAGR for most original equipment makers (OEMs) while noting that TVS Motor and Tata Motors are also strengthening their EV franchise well.

Price targets

"We find this attractive in the context of a strong earning cycle. We have fine-tuned FY24-25E EPS estimates for our coverage within plus/minus 4 per cent range. Our preferred buys are TVS Motor, Tata Motors and Sona Comstar; we are also positive on Ashok Leyland, Maruti Suzuki, Eicher Motors, Bajaj Auto and Hero MotoCorp," the brokerage said while upgrading its rating on Mahindra & Mahindra (M&M) to 'Hold' from 'Underperform post recent correction.

Valuation table

The brokerage, however, remains concerned on an imminent downturn in tractors though, which limits it from taking a more positive stance on the stock.

India's auto demand, after suffering its worst downturn in decades, appears poised for continued double-digit growth in FY24-25, Jefferies said.

It noted that two-wheelers have lagged in recovery but the abnormal 35 per cent fall over FY19-22 created a very favourable base for the segment that is core to personal mobility.

"We believe 2Ws are ripe for a replacement cycle too. We see 2Ws outpacing 4Ws with 18 per cent CAGR over FY23-25E. While PVs have witnessed some demand moderation in recent months, we see tailwinds from low penetration, aging vehicles-in-use, and reverse shift from shared to personal mobility, driving 11 per cent CAGR over FY23-25E," it said.

EPS table

The brokerage noted that trucks have entered the third year of up-cycle and it expects a 12 per cent CAGR over FY23-25E. "Tractors, conversely, are at risk of a downturn, and we expect 15 per cent fall in FY24E (FY23E: up 12 per cent). Compared to our earlier estimates, we have slightly cut FY24-25E industry volume for PV and 2Ws by up to 3 per cent," it said.

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