Auto in upcycle, stock rally likely to continue | Economic Times

Mumbai: The NSE automobile index has outperformed the broader Nifty by a wide margin over the last one month, as vehicle makers posted strong volumes growth in the recently concluded festive period. The rally in auto stocks could continue as the sales upcycle tends to last at least three years, analysts said.The NSE Auto index has surged 17.5 per cent compared to a 4.5 per cent gain in the Nifty on the back of multiple factors. Automobile firms’ strong volume performance has been supported by pent-up demand and considerable reduction in Covid-19 cases from peak levels, coupled with sentiment turning positive after unlocking, analysts said.“Strong quarterly operating performance and high earnings have resulted in earnings upgrade and valuation expansion by the Street for auto companies, driving stock prices high,” said Mitul Shah, head of research at Reliance Securities.Tata Motors’ stock has rallied 65 per cent in the last one month, while Bajaj Auto and Eicher Motors have each gained 22 per cent. Hero MotoCorp, Mahindra & Mahindra and SML Isuzu have rallied between 10 per cent and 15 per cent.Bajaj Auto reported its highest-ever profit in the December quarter with a 9 per cent jump in volumes growth.80441231Industry trackers expect a robust cyclical upturn in the next financial year starting April 1 on recovery in economic activity, a continuation of positive rural sentiment, resurgence in urban demand, new product launches, government stimulus, improved availability of finance and a favourable base effect.“Historically, auto volumes have responded positively to improving macros. The sales upcycle tends to last at least for three years,” said Raghunandhan NL, analyst at Emkay Global. “Our top picks are Ashok Leyland, Eicher Motors, Hero MotoCorp and Maruti Suzuki.”“We expect Ebitda for auto firms to improve by 32 per cent YoY on the back of strong volume performance, effective cost-cutting and lower discounts and incentives,” said Darshan Gangar, analyst at Axis Securities.Passenger vehicles volumes are expected to reach 3.2-3.3 million units — a growth of 23-27 per cent — in FY22, while two-wheeler volumes are expected to reach 17.4 million units, or a 15 per cent growth over FY21.Most companies delivered high margins during the September quarter and a few auto and auto ancillary companies, which reported their December quarter results recently, have also turned in stellar operating metrics, Shah added.Analysts also expect strong numbers from auto companies for the quarter ended December 31 as rural demand has remained strong, reflecting in good demand for tractors, motorcycles and entry-level cars.Continued retail momentum, normal or lower-level inventory and positive sentiment indicate that the sales momentum is likely to continue in the coming quarters, Gangar added.