8 Auto And Ancillary Stocks To Buy As Recommended By Motilal Oswal

Motilal Oswal in its latest report on the auto sector has said that 3QFY23 will start witnessing benefits of moderation in commodity prices. Here are 8 auto and ancillary stocks picked from the brokerage report.

Auto stocks that can be bought

Name	Rating	Current market price
Apollo Tyres	Buy	327.8
Bharat Forge	Buy	867.95
Ceat	Buy	1740.7
Eicher Motors	Buy	3249
M&M	Buy	1264.95
Maruti	Buy	8379.55
Tata Motors	Buy	382.15
Tube Investments	Buy	2711

Stable demand environment

According to Motilal Oswal, 3QFY23 volumes were reasonably good, considering channel inventory filling for the festive season in 2QFY23. "Demand largely remained intact across segments, except for the entry-level PV segment. Stable demand environment in the domestic market, along with limited impact of supply-side issues, boosted wholesales. In terms of wholesale volumes, PVs posted 19% YoY growth (-10% QoQ), CVs saw 12.5% YoY growth (-2% QoQ), 2Ws volumes decline 6% YoY (-22% QoQ) and tractors grew 10% YoY (+6% QoQ)," the brokerage has said.

Margins set to improve

Motilal Oswal estimates margins to improve for the second quarter in a row, with 160bp YoY (+40bp QoQ) expansion in EBITDA margins for our Auto OEM Universe (ex TTMT), driven by benefits of raw material cost moderation. Except for Bajaj Auto and HeroMoto Corp, all other OEMs should report margin expansion on YoY and QoQ basis. 3QFY23 will be the first quarter to see benefits of lower commodity prices, which, along with benefits of favorable FX, would drive gross margin expansion of 100bp YoY (+70bp QoQ).

Headwinds recede, others emerge

After facing headwinds for the last 3-4 years, the sector is seeing some of these major headwinds turn into tailwinds, the report states. "While the demand recovery is expected to sustain on the low base, benefits of lower commodity prices should reflect in 3QFY23. On other hand, the increase in interest rates and weakening global macros could raise fresh concerns about demand. We expect a volume CAGR of 10%/17%/9% for 2Ws/PVs/Tractors over FY22-25E. For 3Ws/LCVs/M&HCVs, we expect avolume CAGR of 11.5%/14.5%/21.5% over FY22-25E," the brokerage has said.

Valuation and view

"We revise our FY24E EPS for select companies to account for 1) demand evolution in the domestic market, 2) weakness in exports, and 3) commodity price/FX changes. We lower our FY24E EPS for EIM (-5%), EXID (-5%) and Bajaj Auto (-5%). We have not materially raised our estimates for any company for FY24. There are no major upgrades in our EPS estimates for FY23. We prefer companies with 1) higher visibility in terms of demand recovery, 2) a strong competitive positioning, 3) margin drivers, and 4) balance sheet strength. Our top picks are Motherson, Ashok Leyland and Bharat Forge. We also prefer HeroMoto as a pure play on the domestic 2W demand recovery," the brokerage has said.