The rating on Bajaj Auto and Ashok Leyland has been raised to ‘buy’ from outperform, while the brokerage has upgraded Tata Motors to ‘outperform’ from ‘underperform’.
The government over the weekend announced a slew of measures to rein in inflation including duty cuts on petroleum products and a rejig of import duties on steel products and plastic. The resultant decline in steel prices would be positive for automakers which have been facing high input cost pressures over the last one year. Metal cost per vehicle for most original equipment manufacturers has almost doubled since the first quarter of financial year 2020-21 on account of rising commodity prices but are likely to decline going forward on lower steel and aluminium price expectations.
The BSE Auto index gained nearly 2% on Monday after the government’s measures but succumbed to profit booking on Tuesday, ending down 0.57% at 23,354.90.
“Auto demand is strong across categories, coming off from a low base and we believe demand is likely to post strong growth over the next two-three years as input cost pressures abate,” said CLSA.
“We expect 50-200 bps (basis points) expansion in margins of auto companies due to steel price cut as we assume companies are likely to retain the benefit,” the brokerage said.
CLSA said Tata Motors’ domestic business and Ashok Leyland would benefit the most from decline in steel prices.
Earnings of two-wheeler companies are likely to rise by 3-8% barring which has lower margins than other companies.
The brokerage has raised target prices on auto companies by 2% to over 19%.
On Ashok Leyland, CLSA has raised target price by 19.5% to ₹178 and on Tata Motors by 16.8% to ₹480. The brokerage has raised target price for two-wheeler companies as well but said it prefers companies that are least impacted by transition to electric vehicles.
