TVS Motors, Hero MotoCorp, CIE Automotive and Steel Strips Wheels: 4 Auto sector picks by Axis Securities

In its quarterly review on auto and auto ancillaries sector, Axis Securities said the Indian auto industry has reported a mixed set of results. In Q3 auto sector companies witnessed revenue, Ebitda, and PAT growth on year-on-year (YoY) basis, although falling slightly short of expectations. But there was a decline quarter-on-quarter (QoQ), primarily due to sequential decreases in production volumes across segments.

However, encouraging two-wheeler demand driven by rural markets and a stable margin outlook augurs well for the short to medium-term performance of Auto stocks. Axis Securities has TVS Motor Company, Hero Motocorp Ltd, CIE Automotive Ltd, and Steel Strips Wheels Ltd as its preferred Auto picks.

TVS Motor Company: (target price Rs. 2,350)

Axis Securities said, In Q3FY24, TVS Motor Company deployed an additional Rs 300 Cr in investments for R&D expenditures, building a robust global engineering team, and making investments in subsidiaries such as Norton Motorcycles, SEMG, and Killwatt GmbH. The forthcoming portfolio resulting from these investments is expected to complement the existing TVS Motor product range, with multiple new launches anticipated in FY25 and beyond.

"On Two Wheelar-EV business: The management informed that the TVS iQube is currently available at 400 touchpoints as of Dec’23 and is expected to double over Q4FY24. Additionally, export of the TVS iQube has commenced in Q3, and sufficient capacity is being built in the Chennai plant over the next few years to meet the demand for 2W EVs. The EV market share of TVS in Q3FY24 stands at ~20%, surpassing ICE market share levels (~18)," Axis said.

On EBITDA growth outlook, Axis Securities said TVS Motor Company's EBITDA margins have improved from 10.1% in Q3FY23 to 11.2% in Q3FY24, driven by sustained material cost reduction efforts, commodity softening, opportunistic price hikes taken during the year, and an overall improvement in the product mix. We anticipate EBITDA to grow at a 21% CAGR over FY24E-26E.

Hero Motocorp Ltd: (target price Rs. 5,550)

Axis Securities said, With the launch of differentiated products offering multiple industry-first features, Hero has a clear strategy to capture market share in the premium category of 2W, while also focusing on growing its EV business, expanding Premia stores, upgrading existing stores to Hero 2.0, and investing in marketing through both traditional and digital channels.

It also expects expect the 125cc and above segment to grow faster than the entry-level segment. “With the increase of models in Heros’ stable we expect it to grow at par with the industry (earlier below industry). As the execution strategy plays out in FY25 we conservatively build in a 7% CAGR volume growth over FY23-26E for Hero," Axis Securities said.

The company's EBITDA margin in Q3 came in at 14%, with ~a 200 bps impact due to EV-related expenses. It is expected to improve further on the back of new product launches in the premium category and management's focus on exports in key geographies. With commodity prices expected to largely remain stable, operational efficiency in EVs, and higher ASP led by product premiumisation, we factor in a conservative 14.5% EBITDA margin in FY26E," Axis Securities said.

CIE Automotive Ltd: (target price Rs. 565)

Axis Securities said, the management indicated improvement across segments and customers in CY24, as well as demand-backed Capex. We anticipate the company to report revenue growth of 9.6% CAGR over CY23-26E in its Indian operations.

While the EU market forecast is muted in the medium term, we remain optimistic about the CIE Automotive operations, which demonstrate higher margins, higher returns, and strong cash flow generation capabilities. We estimate a 5.7% CAGR revenue growth over CY23-26E in the EU business, it said.

Light-weighting and safety concerns are expected to drive the industry towards aluminum castings and composites, which are key focus areas for the management. The management reported that within the total new orders in CY23, electric vehicles (EVs) constituted 73% of the EU Forgings business, 51% in Metalcastello, and 15% in the Indian operation," Axis Securities said.

Steel Strips Wheels Ltd (SSWL) : (target price Rs. 325)

SSWL has improved EBITDA per wheel to ~Rs 254 in Q3FY24 from around Rs 248 in Q2FY24. Axis Securities said, “The management is confident of further enhancing margins through product premiumisation, driven by increased alloy wheel business, exports, electric motor hub wheels, and aluminium knuckles in the sales mix”.

It added, the management aims to maintain medium-term EBITDA per wheel margin between ~Rs 250-260 levels, supported by operational efficiencies, albeit partially offset by startup costs at the AMW facility.

The company currently holds a 60% market share for electric hub-motor supplies to 2W EV OEMs and commands a 60-65% wallet share of business from Tata Motors and Mahindra & Mahindra (MnM) each for its EV portfolio. The management anticipates that the EV business will grow at a rate of 25-30% in FY25, supported by the continuation of the FAME subsidy, Axis Securities said.