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CLSA's top stock ideas in auto sector after Q1 earnings

Updated : 2019-08-19 14:58:11

The auto companies reported weak June-quarter results on the back a sever slowdown due to slowing consumer demand and increased registration charges and taxes on vehicle purchase. The outlook also does not look good for the auto firms as top original equipment manufacturer such as Tata Motors, Maruti Suzuki and Hero MotoCorp have announced plant shutdowns ahead of the upcoming festive season. The Nifty Auto index has fallen nearly 5 percent as of the end of the June quarter and has declined nearly 12 percent since then. For the year, the index has slumped 23 percent. Here are the top stock ideas from global brokerage CLSA after June quarter earnings:

Maruti Suzuki (Buy | TP: Rs 7,200 ): CLSA believes Maruti is the best way to play a potential recovery given the higher likelihood of a rebound in PVs, the superior long-term growth outlook for the segment, its solid franchise and benign competition. It said the continued earnings cuts is a drag, but the stock has been bottoming at higher multiples and has seen support at 20x+ PE. CLSA cut FY20-21CL EPS by 8-10% and lower TP from Rs 7,400 to Rs7,200. (Image: Reuters)
Maruti Suzuki (Buy | TP: Rs 7,200 ): CLSA believes Maruti is the best way to play a potential recovery given the higher likelihood of a rebound in PVs, the superior long-term growth outlook for the segment, its solid franchise and benign competition. It said the continued earnings cuts is a drag, but the stock has been bottoming at higher multiples and has seen support at 20x+ PE. CLSA cut FY20-21CL EPS by 8-10% and lower TP from Rs 7,400 to Rs7,200. (Image: Reuters)
Motherson Sumi (Outperform | TP: Rs 110): The auto demand outlook is still weak, although Motherson expects the US plant to ramp-up gradually in the coming quarters. CLSA said after a c.65% fall from peak, stock valuations, relative to a blended PE of Maruti (benchmark for India business) and global auto comps, are more palatable. CLSA cut FY20-22CL EPS by 9-15 percent and lower the target price from Rs 135 to Rs 110. (Image: Reuters)
Motherson Sumi (Outperform | TP: Rs 110): The auto demand outlook is still weak, although Motherson expects the US plant to ramp-up gradually in the coming quarters. CLSA said after a c.65% fall from peak, stock valuations, relative to a blended PE of Maruti (benchmark for India business) and global auto comps, are more palatable. CLSA cut FY20-22CL EPS by 9-15 percent and lower the target price from Rs 135 to Rs 110. (Image: Reuters)
Mahindra and Mahindra (Sell | TP: Rs 495): CLSA said M&M’s earnings outlook has deteriorated, led by weakening tractor demand and a sharp fall in volumes of its legacy SUVs. Higher exposure to diesel SUVs also makes it more vulnerable to upcoming emission norms, said the brokerage. After 10-13 percent volume and earnings Cagr over FY16-19, CLSA sees a cumulative 12 percent volume and 28 percent net profit fall over FY19-21. “Rising investments in subsidiaries remain a concern, especially given their subdued profit contribution,” it said.
Mahindra and Mahindra (Sell | TP: Rs 495): CLSA said M&M’s earnings outlook has deteriorated, led by weakening tractor demand and a sharp fall in volumes of its legacy SUVs. Higher exposure to diesel SUVs also makes it more vulnerable to upcoming emission norms, said the brokerage. After 10-13 percent volume and earnings Cagr over FY16-19, CLSA sees a cumulative 12 percent volume and 28 percent net profit fall over FY19-21. “Rising investments in subsidiaries remain a concern, especially given their subdued profit contribution,” it said.
Ashok Leyland (Sell | TP: Rs 50): CLSA said, “Truck demand has slowed sharply in the last eight months; we believe the downturn will persist, given weak economic activity, a high base from a five-year upcycle, and new axle norms raising existing-fleet capacity.” The FY21-22 dedicated-railway freight corridor launch risks an extended downturn while the diluted scrappage policy proposal is unlikely to fuel much demand, it added. Margin pressure should intensify as the downturn deepens and BS6 costs hit, noted the brokerage. Despite a 45 percent fall since July 2018, 2.2x 20CL PB is expensive for a downturn, it said. (Image: Company)
Ashok Leyland (Sell | TP: Rs 50): CLSA said, “Truck demand has slowed sharply in the last eight months; we believe the downturn will persist, given weak economic activity, a high base from a five-year upcycle, and new axle norms raising existing-fleet capacity.” The FY21-22 dedicated-railway freight corridor launch risks an extended downturn while the diluted scrappage policy proposal is unlikely to fuel much demand, it added. Margin pressure should intensify as the downturn deepens and BS6 costs hit, noted the brokerage. Despite a 45 percent fall since July 2018, 2.2x 20CL PB is expensive for a downturn, it said. (Image: Company)
Bharat Forge (Sell | TP: Rs 350): CLSA said Bharat Forge reported the first YoY earnings decline after eight quarters of double-digit growth. “With US and Indian trucks already weakening and risk of a cyclical slowdown in industrial exports, we see a high likelihood of a simultaneous downturn in its three key segments that form ~65 percent of its standalone revenues,” the brokerage said. CLSA cut FY19-22CL EPS by 13-16 percent and lower the target price from Rs 390 to Rs 350. (Image: Company)
Bharat Forge (Sell | TP: Rs 350): CLSA said Bharat Forge reported the first YoY earnings decline after eight quarters of double-digit growth. “With US and Indian trucks already weakening and risk of a cyclical slowdown in industrial exports, we see a high likelihood of a simultaneous downturn in its three key segments that form ~65 percent of its standalone revenues,” the brokerage said. CLSA cut FY19-22CL EPS by 13-16 percent and lower the target price from Rs 390 to Rs 350. (Image: Company)
Eicher Motors (Outperform | TP: Rs 19,000) CLSA said Royal Enfield’s near-term outlook remains weak given depressed auto demand, but we believe premium 2Ws are better placed than the mass market segment due to lower penetration and relatively lower cost impact as a percentage of vehicle prices from the upcoming BS6 emission norms. RE is also accelerating its network expansion of small-format stores in semi-urban markets, which should provide some tailwind. CLSA cut FY20-21 EPS by 6-7 percent but retain an Outperform rating with an Rs19,000 target price (from Rs21,000). (Image: Company)
Eicher Motors (Outperform | TP: Rs 19,000) CLSA said Royal Enfield’s near-term outlook remains weak given depressed auto demand, but we believe premium 2Ws are better placed than the mass market segment due to lower penetration and relatively lower cost impact as a percentage of vehicle prices from the upcoming BS6 emission norms. RE is also accelerating its network expansion of small-format stores in semi-urban markets, which should provide some tailwind. CLSA cut FY20-21 EPS by 6-7 percent but retain an Outperform rating with an Rs19,000 target price (from Rs21,000). (Image: Company)
Hero Motocorp (Sell | TP: Rs ): CLSA remains cautious on India’s 2W industry given weak demand and big regulatory cost push in 2020. Ebitda margins of 2W OEMs were flattish-to-higher sequentially in 1Q, but CLSA said it believes the respite is temporary as companies will find it tough to pass on the full cost impact of the upcoming BS6 emission norms amid weak demand and high competition. Stock is down ~45 percent from peak, but its 14.5x FY20CL PE is still not cheap in the context of lacklustre earnings outlook. CLSA cut FY20-21CL EPS by 4-6 percent and retain SELL with TP of Rs2,100 (Rs2,350 earlier).
Hero Motocorp (Sell | TP: Rs ): CLSA remains cautious on India’s 2W industry given weak demand and big regulatory cost push in 2020. Ebitda margins of 2W OEMs were flattish-to-higher sequentially in 1Q, but CLSA said it believes the respite is temporary as companies will find it tough to pass on the full cost impact of the upcoming BS6 emission norms amid weak demand and high competition. Stock is down ~45 percent from peak, but its 14.5x FY20CL PE is still not cheap in the context of lacklustre earnings outlook. CLSA cut FY20-21CL EPS by 4-6 percent and retain SELL with TP of Rs2,100 (Rs2,350 earlier).
Bajaj Auto (Sell | TP: Rs 2,275): CLSA said it is cautious on India’s 2W industry given weak demand, competition and a big regulatory cost push ahead. Strong growth in 3Ws and 2Wsexports have been providing cushion, however, 3Ws are now declining YoY and we see risk to 2W exports given the weakening global economic outlook. CLSA’s FY20-21CL EPS is 7 percent-11 pecent below consensus. The stock is down 14 percent over the past three months but its 17x FY20CL PE is still not cheap for a 6 percent EPS Cagr in FY20-22.
Bajaj Auto (Sell | TP: Rs 2,275): CLSA said it is cautious on India’s 2W industry given weak demand, competition and a big regulatory cost push ahead. Strong growth in 3Ws and 2Wsexports have been providing cushion, however, 3Ws are now declining YoY and we see risk to 2W exports given the weakening global economic outlook. CLSA’s FY20-21CL EPS is 7 percent-11 pecent below consensus. The stock is down 14 percent over the past three months but its 17x FY20CL PE is still not cheap for a 6 percent EPS Cagr in FY20-22.
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