Bajaj Auto, M&M, Ashok Leyland among preferred picks as auto stocks race ahead

Auto stocks traded higher on Thursday, with TVS Motor Company, Mahindra & Mahindra (M&M), and Bajaj Auto share price hitting record highs during the session. This rally in auto stocks was driven by optimism regarding the continuity of the National Democratic Alliance (NDA) government following the Lok Sabha election results 2024.

Analysts suggest that the new NDA government may prioritize rural spending over capital expenditure, which is expected to enhance rural demand. Additionally, the forecast for favorable monsoon rainfall supports the recovery of the rural market.

These factors are anticipated to increase disposable income for rural consumers, thereby driving demand in the automobile sector, particularly for two-wheelers.

Also Read: Poll Position: Has the story unraveled for ‘narrative stocks’?

Meanwhile, automobile sales volume in May demonstrated robust performance in the SUV segment and showed some positive trends in the Commercial Vehicles (CVs) sector. Year-to-date (YTD) growth for two-wheelers and SUVs was strong, driven by improved consumer sentiment, successful absorption of price hikes, new model launches, and a gradual revival of rural markets, according to analysts.

Two-wheeler exports experienced notable year-over-year (YoY) growth despite challenges posed by the Red Sea crisis. The temporary slowdown in the two-wheeler sector during May was attributed to the Lok Sabha Elections 2024 occurring nationwide. However, the growth is expected to come back in June.

Also Read: NBFC stocks: Valuations turn attractive, says Emkay Global

In the Passenger Vehicle (PV) segment, the growth trajectory for SUVs remained strong. On the Commercial Vehicle (CV) side, Ashok Leyland experienced overall growth, and Tata Motors showed significant growth, according to analysis by LKP Securities.

The tractor segment presented a mixed trend: Mahindra & Mahindra (M&M) reported mid-single digit growth, whereas Escorts Kubota and VST Tillers Tractors experienced declines. Nevertheless, both companies reported robust sequential growth.

“We remain positive on the auto sector with a cautious view. Our choice is in the following order –two-wheeler, PVs and CVs,” said Ashwin Patil, Senior Research Analyst at LKP securities.

Also Read: Market post Lok Sabha elections: Not PSU or railways but these sectors to remain in focus in near term

Stocks specifically, within the two-wheelers, the brokerage firm likes Bajaj Auto more than its other two rivals as it sees green shoots in the exports now (36.7% of total volumes).

“Also the Electric Vehicle (EV) strength from Chetak and launch of e-three-wheelers can be additional positives. Domestically on the motorcycles side we expect new launches especially the premium ones (Bajaj + KTM + Triumph) to assist posting decent numbers. Market leadership on the three-wheelers takes care of profitability,” Patil said.

On the PV side, he likes M&M because of its strength in the proliferating SUV segment, prudent capital allocation and a robust growth strategy in UVs, EVs and CVs.

Also Read: FMCG stocks likely to see valuation re-rating, says Emkay Global

However, for Maruti Suzuki India, the LKP Securities analyst is concerned about its over dependence on SUVs for growth, as rest of the segments are underperformers, particularly the small car segment.

“We like Ashok Leyland within CVs as it has a diversified revenue base deriving from LCVs, Defense, MHCVs, exports and spares. We are cautious on CVs as we need to closely watch for the growth profile hereon considering the tapering off of the CV cycle. Tata Motors too looks good on JLR strength and domestic EV market leadership. However, the uncertainty on JLR is a risk according to us,” Patil added.

Catch Stock Market Live Updates here

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.