Auto Sector Recovery Continues with Robust Year-over-Year Growth, Tata Motors’ Profit Margins Optimistic
The auto sector in India is slowly recovering after the impact of the pandemic, with the second quarter of the current financial year showing a mixed outcome in wholesale trends. According to the India Autos report BNP Paribas, three-wheeler sales have shown a significant year-on-year (Y-o-Y) recovery, while passenger vehicle sales have grown in the mid-single digits. However, sales volumes of two-wheelers have experienced a slight decline compared to the previous year.
A closer look at the retail volume market share reveals that Bajaj Auto and Honda Motorcycle & Scooter India have lost market share in the two-wheeler segment, while TVS Motor Company and Suzuki have gained market share. In the passenger vehicle segment, Mahindra and Mahindra, Toyota, and Maruti Suzuki India have gained market share, while Tata Motors and Kia have lost market share.
Experts anticipate robust double-digit year-over-year revenue growth for most companies in the auto sector, except for Bajaj Auto and Hero MotoCorp Limited. Despite the challenges, operational efficiency and a favorable product mix have allowed companies to take advantage of substantial volume growth in the last quarter.
Analysts at BNP Paribas are optimistic about Tata Motors’ profit margins, thanks to strong sales of Jaguar Land Rover (JLR). They expect mixed or in-line results for other companies compared to consensus expectations. However, they express a preference for passenger vehicle original equipment manufacturers (OEMs) such as Maruti Suzuki and Mahindra and Mahindra, as well as globally-oriented companies like Tata Motors, due to their disciplined pricing strategies and ability to maintain healthy margins during the economic upswing.
The analysts do have a pessimistic stance on the two-wheeler sector, citing expectations of persistently low growth, subdued festive seasons, the disruptive influence of electric vehicles (EVs), and heightened competition that could negatively impact profitability.
For individual automakers, the analysts recommend a “BUY” for Maruti Suzuki with a target price of ₹13,000, while Mahindra and Mahindra is also a “BUY” with a target price of ₹1,905. Bajaj Auto, on the other hand, receives a “HOLD” recommendation with a target price of ₹4,900. Tata Motors gets a “BUY” recommendation with a target price of 770.
These target prices are based on various valuation methods, taking into account factors such as earnings estimates, sales, EBITDA, and market comparisons. The analysts have adjusted the valuation bases and target multiples for different quarters to reflect the changing demand cycle and industry trends.
Overall, the auto sector in India is on a path to recovery, with strong sales expected for most companies. Tata Motors, in particular, is poised for success due to its strong sales of JLR vehicles. It remains to be seen how the industry will navigate the challenges posed electric vehicles and increased competition in the coming years.