Strong Q3 for auto companies, Tata Motors reports profit for 1st-time in 2 years

This week saw very good Q3 earnings from the auto stocks. Tata Motors reported profitability for the first time in two years. Bajaj Auto reported a record-high EBITDA. TVS Motor posted a fifth consecutive quarter of margins plus 10 percent and for Maruti, the margins went up both year-on-year and quarter-on-quarter.

For stock moves, January has been a very good month for auto so far. Tata Motors is up 15 percent, Bajaj Auto is up 10 percent, and Mahindra And Mahindra (M&M) is now up 80 percent from the lows that it saw in March of last year.

There are a lot of positive triggers such as a pickup in demand, decline in supply side challenges and even lower raw material prices.

However, is there more valuation headroom, and if yes which are the stocks that have headroom?

Bajaj Auto, Maruti, TVS Motor, and M&M - most of these stocks are trading around their historic averages. However, Maruti and TVS Motor have more valuation headroom compared to historic averages. So Maruti currently trades at 24 times FY24, while the historic average PE is 26 times.

TVS Motor trades at about 26 times while the historic average PE is 27-28 times.

A lot of brokerages have gone ahead and upgraded the stocks this week as well. JP Morgan upgraded Bajaj Auto, UBS raised their target price on Maruti to Rs 12,600 and Jefferies’ raised it to about Rs 1,550 on TVS Motor.

Across the board, there are brokerage upgrades, but from the entire list, Maruti and TVS Motor have some valuation headroom as per historic averages.