TVS Motor, Hero MotoCorp and more: Axis Securities lists top picks in auto and auto ancillary sector after strong Q1

Axis Securities has identified TVS Motor Company and Hero MotoCorp as its top picks in the auto sector. Meanwhile, among auto ancillaries, it has chosen CIE Automotive, Minda Corporation and Sansera Engineering.

Q1 Review - Auto

The companies under Axis Securities' coverage reported impressive year-on-year (YoY) growth in Revenue, EBITDA, and PAT at 11 percent, 30 percent, and 28 percent, respectively, exceeding expectations of 10 percent, 24 percent, and 21 percent. This strong performance was fueled by higher average selling prices (ASPs), increased sales volumes, a shift towards premium products, cost optimisation measures, and the benefits of operating leverage, said the brokerage.

However, it noted that on a quarter-on-quarter (QoQ) basis, the companies saw a decline in Revenue, EBITDA, and PAT by 4.5 percent, 4.2 percent, and 2.2 percent, respectively, which was better than the anticipated declines of approximately 6 percent, 9 percent, and 7 percent. This QoQ dip was mainly due to seasonal factors.

The YoY surge in EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) was particularly driven by cost optimisation strategies and stable commodity prices, as observed in companies like Hero Motocorp, Bajaj Auto, Eicher Ltd, TVS Motors, Maruti, and Ashok Leyland, highlighted Axis. Additionally, EBITDA margins expanded by 207 basis points YoY and 2 basis points QoQ, largely due to higher ASPs from premiumisation, effective cost control, and stable raw material costs, it said.

Auto Ancillaries

The companies covered by Axis Securities posted year-on-year (YoY) growth in Revenue, EBITDA, and PAT at 11 percent, 10 percent, and 12 percent, respectively, surpassing expectations of 9 percent, 9 percent, and 8 percent. This robust performance was driven by the premiumisation trend in two-wheelers (2Ws) and passenger vehicles (PVs), stable raw material prices, and effective cost control measures within auto ancillaries, stated the brokerage.

Sansera Engineering, Endurance Technologies, UNO Minda, and Minda Corp all reported significant YoY growth in EBITDA. In contrast, CIE Automotive and Steel Strips Wheels saw flat EBITDA performance. Automotive Axles faced a 17 percent YoY decline due to decreased volumes in the commercial vehicle (CV) trucking segment, further informed Axis.

Q1FY25 Auto Sales and Outlook

In Q1FY25, domestic sales for two-wheelers (2Ws) and passenger vehicles (PVs) grew by 20 percent and 3 percent year-on-year (YoY), respectively, while commercial vehicles (CVs) saw a 3 percent increase. Tractor volumes remained flat.

For FY25, 2W demand is expected to grow in early double digits, approaching pre-COVID levels, with continued rural recovery and premiumisation trends, predicted the brokerage. PVs are anticipated to grow moderately YoY due to a high base, with a shift towards SUVs and increased export volumes. CV growth may remain subdued for short term but has a favorable long-term outlook, supported by macroeconomic conditions and infrastructure development. Tractor growth is expected to be flat to low single digits, aided by favorable monsoon conditions and government support, it forecasted.

Margin Outlook and Investment Strategy

Axis expects EBITDA margins to stay stable, with potential improvements from richer product mixes and higher realisations. The impact of raw material prices is expected to be neutral to slightly negative. It advised a "Buy on Dips" strategy for quality stocks due to recent rallies and elevated valuations.

Its top picks include TVS Motors and Hero MotoCorp for 2Ws, Mahindra & Mahindra for its strong SUV lineup and tractor market position, and Minda Corporation and Sansera Engineering Ltd in auto ancillaries. CIE Automotive, Endurance Technologies, and UNO Minda are also recommended from a long-term perspective.

Stock Picks - Auto

TVS Motor: The brokerage has a ‘buy’ call on the 2-wheeler stock with a target price of ₹2,900, implying a 10 percent upside.

In Q1FY25, TVS Motor Co Ltd (TVS) reported a 15 percent YoY and 4 percent QoQ growth in domestic sales. With expectations of a normal monsoon and ongoing infrastructure support, the industry is likely to see high single-digit growth in FY25, with TVS anticipated to outperform the average, said the brokerage. The company’s EV brand, TVS iQUBE, saw 34 percent YoY volume growth and is expanding its presence with over 750 dealerships and export initiatives. EBITDA margins improved from 10.6 percent to 11.5 percent due to cost reductions, softening commodities, and better product mix, despite a higher share of lower-margin EVs, it further noted. Axis has a long-term EBITDA margin target of 14-16 percent for TVS with a projected 19 percent CAGR over FY24E-27E.

Hero MotoCorp: The brokerage has a ‘buy’ call on the 2-wheeler stock with a target price of ₹6,015, implying an almost 15 percent upside.

As per the brokerage, Hero MotoCorp has strengthened its motorcycle lineup with new launches in FY24 and plans to introduce both ICE and EV scooters, along with premium motorcycle models in FY25. The company aims to capture market share in the premium 2W segment, expand its EV business, and increase its Premia stores to over 100 while upgrading existing stores to Hero 2.0, it added. In Q1FY25, Hero's 125cc segment market share grew from 13 percent to 20 percent, with an expected 6.5 percent CAGR in volumes over FY24-27E. The company's EBITDA margin, at 14.4 percent in Q1FY25, is projected to rise to 14-15 percent for FY25/26E due to scaling operations, product localisation, cost efficiencies, and premiumisation trends, predicted the brokerage.

Auto Ancillaries

CIE Automotive: The brokerage has a ‘buy’ call on the stock with a target price of ₹650, implying an almost 18 percent upside.

In H2CY24, CIE's Indian operations are projected to see a 10 percent CAGR revenue growth, driven by improvements across key customers like M&M, Bajaj, and Maruti, estimated the brokerage. Conversely, the European market remains subdued, with a 5 percent decline in the EU car market and a 30 percent drop in the US off-road market in H1CY24, it added. Axis also expects a gradual recovery is expected in CY25, with a 4.5 percent CAGR revenue growth forecasted for the EU business over CY24-26E. CIE's order book includes new orders worth ₹500 crore in India (30 percent for EVs) and ₹220 crore in the EU (55 percent for EVs), though the EV transition in Europe may be slower due to the removal of subsidies, further stated the brokerage.

Minda Corporation: The brokerage has a ‘buy’ call on the stock with a target price of ₹575, implying an almost 10 percent upside.

In Q1, Minda secured lifetime orders worth ₹2,100 crore, with EVs making up 25-30 percent of these orders. Total new lifetime orders as of June 2024 reached ₹12,000 crore, covering various segments including EV technologies, said the brokerage. Axis expects the company's EBITDA margins to remain between 11 percent and 12 percent in FY25/26E, bolstered by a premium product mix, increased OEM wallet share, improved exports, and operational efficiencies. EVs contributed 5-6 percent to total revenues in Q1FY25, with new facilities under construction for key components in India. Additionally, Minda has formed a 50:50 joint venture with HCMF for automotive sunroofs and closure systems, with a new Pune plant set to start operations by Q1FY26 and an industry potential of ₹8,000 crore by CY28, added Axis.

Sansera Engineering: The brokerage has a ‘buy’ call on the stock with a target price of ₹1,580, implying an almost 6 percent upside.

According to the brokerage, Sansera holds a robust order book with annual peak revenues of ₹1,685 crore, with 49 percent of orders from Non-Auto and Auto Tech Agnostic & EV sectors and 63 percent from international clients. Despite a 20 percent decline in its Swedish subsidiary, the company secured business from Volvo and added Saab and Triumph Aerospace to its roster. Sansera is gaining traction in ultra-high precision components for semiconductor manufacturing. Axis forecasts EBITDA margins at 17-18 percent for FY25/26E, with long-term targets of 20 percent, driven by shifts in the sales mix and operational improvements. The company has also planned a ₹450 crore capex for FY25, focusing on Tech Agnostic EV and Non-Auto products, and has signed an MoU for greenfield expansion in Karnataka, further informed the brokerage.

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 taking any investment decisions.