Jefferies picks Tata Motors, Maruti, 7 other stocks to buy this reason

Shedding its ‘underperformer’ tag of the past four years, the Indian auto sector is all set to post a double-digit earnings CAGR over FY23-26E making it a prize catch for the investors, Jefferies said in a note while picking 9 stocks as buys out of the 11 in its auto universe coverage.

Jefferies picks Tata Motors and TVS Motor Company as its top picks from the pack while betting on Maruti Suzuki India (MSIL), Ashok Leyland, Bajaj Auto, Eicher Motors, Hero MotoCorp, Samvardhana Motherson and Sona BLW Precision Forgings. The brokerage has a ‘hold’ rating on Mahindra & Mahindra while and an ‘underperform’ on Bharat Forge.

The US-based brokerage finds FY25-based valuations still reasonable notwithstanding the FY24-based multiples, which it said are no longer cheap in case of most stocks. “FY25 based valuations on our estimates are still inline-or-below long-term averages for most stocks. We find this reasonable in context of expectation of strong double-digit earnings CAGR across our coverage over FY23-26E,” Jefferies said in a note.

The Nifty Auto Index, after lagging Nifty50 for four years, has outperformed by 33% in 2022-23. The key driver of the stock has been the improving one-year forward earnings outlook rather than valuations, the brokerage note said.

Citing examples, Jefferies said the rally in Tata Motors and Ashok Leyland has been entirely led by earnings outlook while one-year forward PE ratios have contracted in 2023. Even for Maruti and Samvardhana Motherson, earnings outlook has contributed over 85% of stock gains, the report highlighted. Other stocks with similar trends include TVS, Sona Blw and Bajaj Auto.

Improving demand and margin trajectory, along with a good product cycle for several companies, is driving a fresh upturn in autos resulting in the outperformance of the index, the report said.

The Nifty Auto Index lagged Nifty-50 for four years in a row between 2018 and 2021, underperforming the latter by 74% entering its worst downturn of decades initially led by regulatory cost push and financing issues which were later compounded by Covid and sharp rise in commodity prices. Though the lag still remains at 54% since 2018 against the broader Nifty50, the report noted.The 15-stock index has outperformed Nifty50 for 8 years between 2010 and 2017.

Stocks to Buy
1) TVS Motor: Buy | Target: 1,750 (up from Rs 1,550)

2) Tata Motors: Buy | Target: Rs 800

3) MSIL: Buy | Target: Rs 12,000 ( up from Rs 11,500)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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