Auto stocks shine as Street finds valuations attractive

Mumbai: Shares of automobile makers were among the top gainers on Thursday driven by investors' appetite for value in a market that is punishing companies, which have not lived up to the market's earnings expectations.

Auto stocks have been out of favour in recent times due to supply-side woes, low uptake in consumer demand and margin pressure led by high raw material costs. Though these bottlenecks remain, auto stocks have been outliers in the market for the last two days, partly due to cheaper valuations.

The BSE Auto index gained 2% more on Thursday to 25,203.12 led by Eicher Motors, Escorts, Mahindra & Mahindra, Balkrishna Industries, MRF and Maruti Suzuki India, which advanced in the range of 3-5%. The index was up 2% the previous day.

"There is a rotational play towards sectors that were beaten down badly. Also, there is surplus liquidity due to sell-off in IT names and HDFC twins. That money is finding its way into auto names and other consumer plays," said Hemang Jani, head of equity strategy-broking and distribution at Motilal Oswal. "Supply-side issues remain in the auto space and there may be incremental challenges but investors are buying auto stocks due to positive risk-reward," said Jani.

The BSE Sensex gained 20% the last year, and the auto index is up 16% during the same period.

Among automobile companies, analysts prefer four-wheelers over bikes and scooters, which could see higher margin pressure amid weak rural demand. Investors are bullish on product launches by car makers, especially Maruti. Mahindra & Mahindra is among the most favoured names in four-wheelers.

"We are looking at four-wheeler space. We believe they will do better than two-wheelers as a lot of two-wheeler sales come from rural part and rural demand is pretty weak and margin pressure will be more in the case of two-wheelers," said Gaurav Dua, head of capital market strategy at Sharekhan by BNP Paribas.

In a note, Jefferies said it sees the highest upside in TVS, Mahindra & Mahindra, and Maruti Suzuki gave their attractive risk-reward profiles. These three stocks also benefit from strong launch pipelines, which should cushion cost pressures, said Jefferies.