PVs or 2-wheelers? How to play the impending rally in auto sector

The Nifty auto index trades flat, with a positive bias, on a year-to-date (YTD) basis as against a 13 per cent decline in the benchmark Nifty50.

Automobiles are a good trade which is building in especially from the recovery of volume perspective, said Vikas Khemani, Founder, Carnelian Capital Advisors. “We know that because of the semiconductor chip shortage, demand and growth have been muted but 2023 could be a very good year from that perspective,” Khemani added.

Auto index has underperformed the market for the last four years. Even now, semiconductor and supply chain issues linger but demand for automobiles remains strong, with a waiting period of three months to two years.

Industry experts suggest that healthy booking and single-digit cancellation show that demand may stay put even when normal supply resumes in months to come. This optimism is getting reflected in the share price movement of leading auto stocks.

M&M,

and are up 2-11 per cent in one month versus a 6 per cent fall in Nifty50. and though trade marginally in the red have managed to outperform.

“After many years of underperformance, we are seeing auto shares come back quite strongly. They are in a kind of blue sky scenario at this point in time. We have seen a clear-cut turnaround in their fortunes. At higher volumes and with this latest government move to reduce steel prices, a lot of the pressure on their operating profit margins will ease. Auto shares will likely come into the leadership position over the next several months and quarters,” Dipan Mehta, Director, Elixir Equities told ET NOW.

Where to bet: PVs, CVs, 2Ws?
While overall auto sector valuations look lucrative, analysts are leaning towards consumer-facing stocks, especially in the four-wheeler segment. The consensus view remains weak on two-wheelers.

Hemang Jani of

expects demand to improve for passenger vehicles (PVs) on the back of easing supply chain issues. However, he sees a slow recovery in 2-wheelers (2Ws).

Data pointed out that retail sales of passenger vehicles grew last month but the sales of two-wheelers and commercial vehicles remained low compared to the pre-Covid month of May 2019, according to automobile dealers’ body federation of Automobile Dealers Associations (FADA).

“While PV and tractors continued their positive run… two-wheeler, three-wheeler and CV sales are yet to show any signs of healthy run-rate,” FADA President Vinkesh Gulati said in a statement.

Intense competition and the kind of disruption that may come from EVs does not make me optimistic on Bajaj Auto, Hero MotoCorp and

, said Dipan Mehta. Companies like Tata Motors, Mahindra & Mahindra and remain his top picks.

Contrarily,

Research believes there is excessive pessimism in the case of 2Ws and some overconfidence on PVs and CVs, which is reflecting in the valuations.

“Hence, we prefer 2Ws in the auto pack and have a ‘BUY’ on the three stocks in our coverage – Bajaj Auto,

and Hero MotoCorp,” it said.

Headwinds to auto story
While the demand scenario is playing in favour of the auto stocks, tightening liquidity and slowing economic activity in the quarter could play a dampener.

“If the auto loan rates go up by 1.5-2 per cent, then the margin will impact demand to some extent because most of the four-wheelers are financed and that is the only challenge which some of these companies will face,” independent market expert Sandip Sabharwal observed.

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