Auto Stocks to Buy: Auto shares extended their rising streak to the third consecutive session on Monday. The Nifty Auto index rose 1.09 per cent to 11,709.35. The index has added 7.61 per cent in three trading sessions. Maruti Suzuki India (up 1.4 per cent), Ashok Leyland (up 1.18 per cent), Sona BLW Precision Forgings (up 1.13 per cent), Mahindra & Mahindra (up 0.92 per cent) and TVS Motor Company (up 0.71 per cent) edged higher.
After facing headwinds in the past quarters dues to increased costs as a result of rising commodity prices, supply chain issues, volatility in fuel prices and higher prices of vehicles. Auto stocks extended their rally given the stability in metal prices that had raised concerns over margins.
“Positive on the CV sector as all its underlying drivers are in place. Positive on PVs as well as ground demand looks strong coupled with the strong order book. Cautiously positive on tractors and two-wheelers. Need to wait and watch for their sequential improvement,” Ashwin Patil, Senior Research Analyst at LKP Securities said.
The Nifty Auto index has gained 20 per cent since its March lows, turning out to be the biggest gainer among all sectors, pricing in expected benefits of falling commodity prices, especially steel and aluminium, the key material for making vehicles, resulting in easing cost pressure.
“The automobile sector will also see benefits of cooling commodity prices like steel and aluminum. New steel contracts could get negotiated at a lower price which will help improve the margins. The chip shortage will also start to abate significantly in the forthcoming quarters, helping top OEMs (original equipment manufacturers) raise production,” said Naveen Kulkarni, chief investment officer at Axis Securities.
Meanwhile, Morgan Stanley said the volume outlook across segments is constructive and companies have taken price hikes but cost pressures are easing.
On price hikes, Punit Patni, equity research analyst, Swastika Investmart said: “Automobile companies had hiked their prices owing to rising raw material prices, and these hikes are not expected to reverse, thus in case the key raw material prices cool off, these companies will witness a significant boost in their bottom line.”
Nifty Auto Technical Outlook
Tirthankar Das, Head of Technical Research, Ashika Group, said: The auto sector has witnessed a sustainable up move over the last few weeks. Presently, the sector is placed at the edge of an upside breakout of cluster resistance of up and down sloping trendline around 10,600. Hence, a sharp-up move from here could open a sharp positive impact for the sector. Positive chart patterns like higher tops and bottom are still in place in a weekly time frame. On the oscillator front, no signs of reversal can be seen yet, weekly 14-period RSI continues to remain positive.
Top Stock Picks from Auto Sector
Morgan Stanley is overweight on Maruti Suzuki, Ashok Leyland, Tata Motors, M&M, and Eicher Motors. “We are equal-weight on Bajaj Auto & Samvardhana Motherson, whereas we are underweight on Amara Raja Batteries, TVS Motor Company, and Hero MotoCorp,” it said in a report.
While picking auto stocks to invest in, Patni said: “The sector outlook remains positive from a medium to long-term perspective. The majority of issues like high commodity prices, semiconductor shortage, and covid-led disruption are subsiding & the demand is witnessing a revival.”
The company is poised to perform well in the medium to long term time horizon due to improvement in product offering and cool off of key raw material prices. Further, the affordable segment i.e. below Rs. 10 lakh, the major focus area of the company is expected to perform well on the margin front due to a reduction in commodity inflation. This segment is extremely priced sensitive and the company was facing the issue of the inability to hike prices without sacrificing volumes we expect this problem to subside in the future.
The company has witnessed a complete makeover post the change in management. The company has seen market share gains due to its phenomenal product offerings. The company has been able to capitalize on the trend of rising preference and awareness of customers towards safety and build quality; the company’s new offerings have received rave reviews, especially in this aspect. Further, the company is one of the biggest beneficiaries of the ICE to EV transition because of its first-mover advantage and synergistic benefits from other group companies.
Due to the impacts of covid subsiding, government infrastructure expenditure, growing construction activities, and rising demand from the replacement side, the CV demand is anticipated to see a comeback. One of the major gainers from the increase in demand for CVs is this company. Additionally, due to the lack of semiconductors, the LCVs were experiencing supply-side problems. LCVs are anticipated to resume their normal operations as the signs of respites are visible.
Tirthankar Das of Ashika Group said his stock picks are M&M, LG Balakrishnan & Bros Ltd.
The stock has been consolidating for more than a month between 980-1050. This consolidation is in the form of a ‘Flag’ formation. Price now has broken out of the pattern with a wide-ranged candle and an increase in volume. This momentum forecasts the beginning of an uptrend in the stock. One can accumulate the stock at the current level for an upside target of 1,125 in a medium to long-term perspective.
LG Balakrishnan & Bros Ltd
Price rebounded after taking support at the 23.6 per cent retracement area of the 2-year-old rally (High:736; Low:145), signaling further upward momentum. On the oscillators front, the daily 14 periods RSI has rebounded from oversold territory and generated a buy signal thus validating positive bias. Accumulate the stock at the current level for an upside target of 670 in the near term.