Trimming growth estimates for FY24 in Auto sector: IIFL Capital Services

12 Apr 2023 , 09:28 AM

FY23 was a strong year for Auto, with key segments clocking 12- 49% growth vs FY22. However, YoY growth moderated over the course of FY23. Current SAAR implies that growth rate will taper down in FY24. Analysts of IIFL Capital Services cut their FY24 volume growth estimates across auto segments by 200-500bps. As a result, they cut EPS estimates across auto OEMs by up to 6%. Tata Motors stands out with an EPS upgrade of 8-9% as ramp-up in JLR volumes more than offset the cut in India operations. 

Current SAAR does not inspire confidence for FY24 growth:

Current SAAR is lower than FY23 volumes in case of Cars, 2Ws and LCV. In other words, substantial improvement in volume trajectory is required from Q4FY23 levels, for the industry to report strong growth in FY24. In case of MHCV and tractors, current SAAR is higher than FY23 volumes. MHCV sales may have been inflated in Q4FY23 due to “pre-buy impact” before emission norms took effect. Tractors SAAR is holding up, but we are cautious on demand in coming months given possibility of El Nino.

Cut EPS estimates by up to 6%; Tata Motors stands out due to JLR:  

Analysts of IIFL Capital Services cut their FY24 volume growth estimates across auto segments by 200-500bps. As a result, we cut EPS estimates across auto OEMs by up to 6%. Tata Motors stands out with an EPS upgrade of 8-9% as ramp-up in JLR volumes more than offset the cut in India operations.

M&M – downgrade to ADD:

In FY24, two of M&M’s three key segments (LCV, tractors) would struggle for growth. We forecast 0% volume growth for LCV and 5% growth in tractors, with a downside risk if El Nino hurts rainfall. Coming to UVs, M&M would have the tailwind of recent new models and a strong order-book in H1FY24.

Hero – downgrade to ADD: 

On one hand, there is low visibility of growth in 2W industry volumes. To top it, Hero is losing market-share and hence not reflecting the recovery in industry volumes. Following the drop in volumes of its key models (Passion, Glamour), Hero is dependent on one model for its volumes (Splendor is now 63% of domestic volumes).

Bajaj Auto – Upgrade to BUY: 

Bajaj’s export volumes (2W+3W) have fallen 50% from peak and are showing signs of bottoming out. While our forecast of 15% EPS Cagr may not seem stellar, it implies total return of 20% when combined with a 5% dividend yield. There is also potential for re-rating from the current 18x FY24 EPS, if visibility on exports improves.

Eicher Motors – Upgrade to BUY: 

The stock has corrected 23% from the peak in H2CY22 and risk-reward is now looking favourable. The premiumisation trend into >250cc motorcycles took a pause at 6.0-6.5% of overall motorcycles over FY17-FY22. The premiumisation trend is beginning to gather pace with >250cc segment climbing to 7.8% in FY23. Eicher remains the best play on premiumisation in the industry.