The Nifty auto index is in the spotlight as it is racing ahead of other indices on the National Stock Exchange (NSE) amid a further improvement in margins expected during the first quarter of financial year 2023-24 (Q1FY24) driven by operating leverage benefits. The index, comprising 15 automobile companies, hit a fresh record high of 15,630.20 in Monday's trade.
The auto index has gained in eighth out of the last 10 trading sessions. On a year-to-date basis, the Nifty Auto index has rallied 23.48 percent, compared to the 6.41 percent rise in the Nifty 50.
Among auto stocks, Tata Motors remained the top performer as the stock surged 58.81 percent so far this year. Meanwhile, shares of Bajaj Auto and Sona Blw Precision Forgings also rose 37.15 percent and 29 percent, respectively. TVS Motor, Mahindra And Mahindra surged up to 23 percent in 2023.
This sector has gained significant traction in the recent months due to the robust outlook for demand amid product launches and easing concerns over profitability. Moreover, growing focus into electric vehicles has driven both auto and auto component makers.
Fifth quarter of margin expansion
Analysts estimate EBITDA margins to improve for the fifth quarter in a row, with a 220 basis point year-on-year gain (up 50 basis point quarter-on-quarter) for the auto OEM (original equipment manufacturer) universe (ex-JLR), led by a better mix, favorable foreign exchange, and operating leverage benefits.
Except for commercial vehicle-focused OEMs (due to operating deleverage) and Maruti Suzuki, all other OEMs are likely to report margin expansion on a QoQ basis as well.
"Going forward, our estimates are building for stable commodity cost, but expect to accrue benefit of favorable mix/Fx and operating leverage, leading to sustained margin recovery," Motilal Oswal said in a report.
How to trade auto stocks?
The auto index has witnessed a significant rally in the last three months from 11900 zone to touch the peak zone of 15600 levels currently outperforming the other major sectors gaining almost 31 percent.
"The near term support for the index is visible near 15200 zone while the major support is at 14600 below which the trend would turn negative. The next upside projected target from here on is 16250 once a decisive move past 15600 is confirmed," said Vaishali Parekh, Vice President - Technical Research at Prabhudas Lilladher.
Analysts also prefer companies with higher visibility in terms of demand recovery, a strong competitive positioning, margin drivers, and balance sheet strength. "Among auto component stocks, we prefer Motherson Sumi Wiring India and Bharat Forge," Motilal said.
Q1FY24 was a mixed bag from demand perspective, with signs of volume growth moderation in some segments. "Demand largely remained intact for domestic two-wheelers and private vehicles, whereas volumes declined for commercial vehicles (due to pre-buy in 4QFY23) and tractors (high inventory and Navratras in March 2023). Exports of two wheeler remained weak," Motilal stated.
At Rs 5,821 crore, automobiles and auto ancillaries also saw the second highest inflows in June from FPIs (foreign portfolio investors). The sector has seen foreign inflows for six months in a row till June.
First Published: Jul 10, 2023 12:25 PM IST
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