Stocks

auto stocks to buy: Why is Mitul Shah betting on these 2 stocks in the auto space?

“For ancillary tyre companies, we remain positive for all the companies particularly and Apollo Tyre wherein there is an improvement on the OEM side in terms of production as we all know that semiconductor issues are slowly getting sorted out,” says Mitul Shah, Head of Research, Reliance Securities



Among two-wheelers, four-wheelers and auto ancillaries, what is your preference? What would you advise investors to buy considering steel and various metal prices are down?
Among the two-wheeler companies, Bajaj and Hero are trading at attractive valuations. However, the domestic side is not improving. As per our channel check, there is some improvement but it is below par and if we compare pre Covid levels, there is still a sizable decline in two-wheeler volumes on the domestic side.

At the same time, export is also under pressure since the last three, four months, particularly African countries where affordability has become a slight issue due to global inflation. So in the two-wheeler space overall, we have a buy recommendation because of attractive valuation but we believe that it would take some more time to give sizable return to investors. We prefer

over others and we like a few ancillary companies like Bharat Forge wherein traction is coming from domestic CV side as well as non auto space.

Initial data suggest that the festive sales over the Diwali weekend were quite strong. Have you done your channel checks and what do they suggest?
For ancillary tyre companies, we remain positive for all the companies particularly Ceat and Apollo Tyre wherein there is an improvement on the OEM side in terms of production as we all know that semiconductor issues are slowly getting sorted out. So production levels of all the OEMs are increasing every month and will probably continue in the second half also.

At the same time, most managements have commented during the last conference call that replacement demand is also improving significantly. So traction coming from OEM as well as replacement and export volume because these companies have expanded well in the last few years and new product launches have taken place in European countries.

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Most of these companies, particularly Ceat and Apollo, are benefitting from higher exports with a favourable currency, OEM improvement and the replacement coming back. We believe that some rerating would happen as these companies have traded at lower valuation in the past 1-1.5 years and that will go back to historical higher multiples during the up cycle.
We remain positive on Ceat as well as Apollo Tyre.

The other thing of course is the cost pressures because of the commodity uptick. Do you think players like will be able to pass it on to consumers without getting much of an impact on their volumes or not because we are again seeing metal prices rebounding?
Commodities have already started correcting. Aluminium has corrected in a very big way, steel prices are down by more than 25% from the peak level but as all these companies have a long term contract of three to six months, they are not realising those benefits. So the second half, particularly Q3 onwards, we will see those benefits.

We believe that there is a strong order book in the case of Maruti. It has an order book of 4,40,000. There is a strong booking for Grand

– 75,000. In this situation, demand is very high, supply is not matching. We believe these companies will not pass on the benefit to customers except for a few entry level cars, where demand is still weak. They may be able to pass on to some extent, but overall benefit would be retained by these companies going forward and margin expansion should be there on cards.


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