Auto Sector Outlook: 2023 may not be as strong as 2022 amid expensive valuations – Maruti, M&M, TVS Motor, Bajaj Auto in focus
Auto Sector Outlook, Auto Sector in 2023, Auto Sector in 2022: The coming year 2023 is unlikely to be as strong as 2022, with rich valuations and limited upside to earnings estimates, a global brokerage firm HSBC Securities said while highlighting the key factors for the automobile sector in an outlook report.
The auto industry’s 2022 performance was broadly in line with the brokerage’s expectations, with a slight positive surprise from PVs (passenger vehicles) and some continued disappointment from 2Ws (two-wheelers) in 2022, the global brokerage said in its overview of the current calendar year.
Going into 2023, HSBC’s optimism is a bit more subdued. Stocks have run up well in 2022, valuations are generally not cheap and commodity tailwinds are already baked into as per its estimates.
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Still, volume base effects remain favourable from a muted 10-year performance (FY12-22) and we think they could drive healthy growth over FY24/25e, the brokerage further added.
The brokerage carry forward 2022 preferred names – Maruti Suzuki, Mahindra & Mahindra, TVS Motor, and Bajaj Auto, all rated Buy with a target price of Rs 11,000, Rs 1530, Rs 1300, and Rs 4100 per share, respectively. While Downgrade Hero MotoCorp to Hold with Rs 3,130 per share.
Our core themes for FY23/24e are as follows:
1) We expect PV growth to moderate to 12% in FY24e vs 29% in FY23e. For 2Ws, we expect a modest recovery in FY24e on mixed FY23e performance and expect CVs (commercial vehicles) to maintain strong growth and tractors to grow in the low single digits, though this will be high contingent on monsoons. Our 10-year CAGR (FY13-23e) forecasts for PVs/2Ws/CVs/tractors are 4%/2%/2%/5%.
2) In FY24e, we expect Maruti Suzuki to gain back some market share, but nowhere close to historical highs. The company is ramping up Vitara now and expects to launch its Jimny and Baleno cross-over in the next few months, which should accrue to its volumes.
3) Commodities should assist margins in FY23, though we expect discounts to move up in PVs and consensus earnings are unlikely to be upgraded.
4) Exports should improve in FY23 (post a dismal FY22), especially Bajaj and TVS.
5) EV penetration should improve further in 2023, though gradually and with no inflection point in sight. A rise in battery costs and low economies of scale will likely keep the EV (electric vehicle) bill of material much higher than for ICE (internal combustion engine) in 2023 as well.
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