'Quality at a reasonable price': HSBC picks Tata Motors, M&M as its top 2 auto stock ideas

HSBC Global Investment Research on Wednesday said it relatively prefers auto original equipment makers (OEMs) with reasonable valuations, defensive revenue profile, and long-term structural growth, as it picked Mahindra & Mahindra Ltd (M&M) and Tata Motors Ltd (TMCV) as it top two auto sector picks.

The foreign brokerage said commodities remained a headwind, though demand has proven a lot more sustainable than the market expected. Preference is for quality at a reasonable price, it said.

"Across the coverage universe, valuations are at a premium to historical averages – 2Ws are lot more expensive, while 4Ws are relatively inexpensive. Over the next 1–2 years, we favour stocks that combine: reasonable valuations, defensive and diversified revenue profile, and long-term structural growth drivers. Within the sector, our relative preferences are M&M and Tata CV," it said.

HSBC said despite an extremely challenging cost environment, most companies delivered a broadly resilient set of Q1 results. Notably, most 2W-OEMs reported minimal margin contraction, indicating effective pricing and cost-control actions, it said.

Bajaj Auto Ltd and TVS Motor Ltd continued to benefit from a diversified revenue stream, supported by a strong export tailwind, and amplified by favorable currency movements. Eicher Motors Ltd also delivered a robust quarterly performance, HSBC said.

Within 4Ws, Hyundai Motor India Ltd demonstrated unexpected resilience, outperforming relative expectations despite adverse conditions. In contrast, Maruti Suzuki India Ltd and M&M recorded sequential margin declines, broadly in line with expectations.

"CV OEMs posted a reasonable quarter overall, with performance trends sitting between those observed in the 4W and 2W segments," HSBC said.

"Commodities remain a key pressure point: While there is a modest softening in commodity prices in 2Q so far, input costs are broadly stable recently and still a drag on profitability. In response, most OEMs implemented price increases in July and August again (refer to exhibit 5). This should provide partial margin support, although the effectiveness will depend on elasticity of demand, and the pace at which commodity pressures ease," HSBC said.

Encouragingly, said HSBC, demand has remained firm across segments, even after successive price hikes. Although the market is already positioned for an unfavorable base in 2H, expectations have improved.

"We now anticipate mid-single-digit growth in 2H, compared with low-single-digit growth previously across OEMs. In addition, monsoon-related risk has somewhat eased. That said, continued price increases and challenging y-o-y comparatives remain key concerns for the 2HFY27 and FY28 growth trajectory, particularly if consumer affordability comes under pressure," HSBC said.