Sectoral spotlight: Auto stocks step on gas pedal; M&M, Maruti, Tata Motors top buys

Auto stocks have been in action over the past week witnessing a broad based rally. While the medium to long term prospect remains strong for the sector, stock selection will be key to reap benefits. Investors with a short term view can look to book profits while those willing to make new positions should see dips as buying opportunities.

The automobile sector has been in the spotlight having delivered strong May sale numbers. The stocks have benefitted from the buzz, delivering sustained rally. Moreover, the 15-stock Nifty Auto index has outperformed the broader Nifty50 and given over 28% returns in the 12-month period versus 12% returns given by the latter during this time.

"Talking about the auto sector, the Nifty Auto Index was up 3% this week led by the likes of Tata Motors, Bajaj-Auto, Hero MotoCorp, Ashok Leyland and M&M. All these stocks were up by almost 4% this week, clearly indicating a broad-based rally," Aamar Deo Singh, Head Advisory at Angel One told ET Markets. His advice to investors is to book part profits and trail the balance as short-term indicators in Nifty50 are displaying fatigue at higher levels and profit booking cannot be ruled out.

"There is a pent-up demand as buyers wait for deliveries of their preferred cars. The situation in India has been paradoxical as we have seen strong demand trends despite the country being at the higher end of the interest rate cycle," Kranthi Bathini, Director-Equity Strategy at WealthMills Securities said. He said that the demand for two-wheelers and four wheelers have remained robust reflecting the strong India consumption story and the auto sector will continue to outperform its peers in the long term.

His top picks with a long term view are Maruti Suzuki India (MSIL), Tata Motors and Mahindra & Mahindra (M&M). They have a return potential of 15-20%, Bathini said.

Top brokerages including LKP Securities, JM Financials and BNP Paribas remain positive on the sector, though they recommend a stock picking strategy.

LKP's preferred picks include M&M, Maruti Suzuki, Bajaj Auto, TVS Motor, Ashok Leyland. "Every dip in the stocks mentioned above, shall provide good opportunities for investors to enter into them from a medium to long term perspective," the brokerage said.

BNP Paribas picked Maruti Suzuki, and Tata Motors as its top bets while it remains bearish on 2W OEMs except Eicher Motors as weak exports off-set the domestic growth story. Domestic 2W sales jumped 27% YoY in May while exports declined by 29% YoY.

Recommendations by BNP Paribas
-- Buy: MSIL / Mahindra & Mahindra / Tata Motors / Ashok Leyland / Eicher Motors

-- Hold: Bajaj Auto / TVS Motor Company

-- Reduce: Hero MotoCorp

Recommendations by Axis Securities
Buy Maruti Suzuki / Ashok Leyland

Recommendations by Sharekhan
Buy Ashok Leyland / M&M / Maruti / TVS Motors / Tata Motors

Risks

1) Impact of expected El Nino needs to be seen on the rural centric segments like tractors, LKP Securities report said.

2) CVs are witnessing a temporary dip on the back of BS VI phase-2 implementation, while underlying strength would keep going strong, the report said.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)