04 Jul , 2022 By : Kanchan Joshi
Domestic brokerage and research firm Axis Securities is ‘overweight’ on the auto sector as it believes the Indian Automobile sector has seen a significant demand improvement with most categories witnessing encouraging traction.
The long-term outlook for the auto industry remains positive as demand drivers are intact and many companies may offer decent upside from current levels, the note stated.
Axis Securities' top stock picks in the auto sector includes Bajaj Auto with a target price of ?4,200, Maruti Suzuki India Ltd (TP: ?9,800), and Ashok Leyland Ltd (TP: ?164) with buy ratings on the three auto stocks.
Bajaj Auto seems to capitalize on demand normalization and premiumization trends in the 2W industry which should support profitability and operational performance going forward, said the brokerage, adding that Bajaj Auto remains its preferred pick in the 2W segment given reasonable valuations and strong medium-term growth prospects.
Axis Securities believes that Ashok Leyland remains well-positioned to benefit from a strong recovery in the CV cycle on the back of new product launches and a well-diversified product portfolio.
“In Q4FY22, auto companies broadly reported better-than-expected results, exhibiting outperformance on the margin front, which was aided by improving product mix, higher realizations, cost control measures, and positive operating leverage led by improving volumes. We expect new product launches to help drive excitement among buyers with the SUV segment retaining the consumer pulling power," the brokerage house said.
Demand momentum in the commercial vehicle (CV) segment is likely to sustain and we expect the CV cycle to maintain its momentum driven by the pickup in the economic activities and the government’s focus on infrastructure, the report highlighted.
Furthermore, the introduction of a duty on steel export may lead to gross margin improvement for Automakers, which is expected to translate into earnings upgrade as most of the companies are likely to retain the benefit. Based on the current development and positive outlook, the brokerage has upgraded the sector to Overweight from the earlier Equal weight stance.