What’s in store for auto stocks?

Auto stocks have sprinted in the market rally since 2014. Despite some volatility, most auto stocks have turned multi-baggers with players such as Eicher Motors and Ashok Leyland moving up by a whopping 4-5 times.

TVS Motors has also been a big gainer among two/three-wheeler players, eclipsing market biggies such as Hero MotoCorp and Bajaj Auto. Even as Mahindra and Mahindra lagged behind due to gaps in its product portfolio and poor tractor sales, Maruti Suzuki was on full throttle, as it shed its small car-maker image and added value to its product mix. Launches such as the SX4 S Cross and Vitara Brezza in the cross-over, UV segment and the Ciaz and Baleno sedans took the market by storm.

With bettering sales volumes and lower input costs due to the global meltdown in commodity prices, many companies also delivered on the earnings front. Take Ashok Leyland, for instance. With CV sales picking up in 2014-15, the company turned around from losses earlier to making profits in the September 2014 quarter. For the year ended March 2016, the company’s profits more than doubled to ₹722 crore, from ₹335 crore in 2014-15. Maruti Suzuki clocked 20-30 per cent growth in net profits in each of the last two years. Ditto with TVS Motors.

Nevertheless, after more than two years of being market favourites, the valuations of some stocks have become expensive, leaving limited room for upside. Although strong earnings growth has seen its valuations moderate, Eicher Motors, for instance, is among the more expensive stocks, trading at a valuation of around 46 times its consolidated trailing 12 month earnings. Besides, considering the headwinds for some of the segments, it is time investors adopt a selective approach.

Among two-wheeler makers, both Bajaj Auto and Hero MotoCorp are trading at a reasonable valuation of 20 times their trailing earnings. Hero MotoCorp is well placed to benefit from the expected revival in demand for entry-level bikes this year. Bajaj has had some successful launches in the entry segment in the recent past as also the premium segments, but concerns on its export markets, which bring a third of the revenues, remain.

Maruti Suzuki’s valuations have expanded too, from about 17 times in early 2014 to 30 times now. But considering the pole position the company is in now, it may still have steam left.

M&M still seems on a sticky wicket with tractor sales picking up on the one hand and the clampdown on bigger UVs on the other.

While existing investors can hold on to Ashok Leyland and Eicher Motors, fresh exposures need not be taken now, considering that much of the benefits have been priced in. Investors can book profits in small-cap stocks that are also only fringe players such as Force Motors and SML Izuzu. Considering the reasonably strong wicket the Jaguar Land Rover business is on and that domestic operations too have begun doing well for the company, Tata Motors can be a good bet for long-term investors.

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