Auto stocks to buy | Maruti | Ashok Leyland: Kumar Rakesh explains why he is not worried about Tata Motors; 2 auto stocks to bet on

A few days ago, BMW had lowered its 2024 guidance, citing concerns about the Chinese market. That has also put pressure on Tata Motors’ share prices, given that China is also a key market for them. Globally, how do you see the car sales volume? Is the weakness only in the Chinese market or are the European and US markets also showing some signs of weakness?
Kumar Rakesh: The cut in forecasts clearly indicates that there is some moderation in the demand environment. We regularly monitor demand trends across geographies and after two years of steady growth, over the past two months we have started to see year-over-year growth in major developed markets starting to slow. That said, if we look at the side data points that we track consistently and which we consider to be strong leading indicators of demand, it remains largely mixed. It does not indicate a sharp deterioration in the demand environment.

The consumer confidence index in most geographies remains stable. Used car prices in the US surprisingly moved up in the last month, although incentives and inventory levels have definitely started to increase and that is why I mentioned that the demand environment seems to be mixed and definitely moderated from the high growth that we had seen over the last two years. But so far, there is no indication that we are heading towards a very pronounced moderation in demand. China, most of the auto companies had already talked about that they are seeing incremental pressure and weakness in demand.

The company you talked about was one of the few that talked about an improvement and there seems to be a convergence in the outlook on the China side in the sense that the demand outlook is definitely not improving in that geography. Fortunately, the dependence on China, at least in terms of profitability, has come down significantly from what it used to be seven or eight years ago and in that context, the impact of moderation in China may not be as significant as it was in 2015-16.

Yesterday Tata Motors fell by 6-7%. Heavy discounts are worrying people. There is high inventory in the system. Also, BMW has reduced its forecast. What do you think about this? And what is your recommendation on Tata Motors?
Kumar Rakesh: We like Tata Motors and believe that their guidance for fiscal year 2025 should not be at risk at this stage. They have already given very conservative guidance, which should be quite achievable. They have talked about single-digit revenue growth for this fiscal year and a virtually flat EBIT margin for the JLR business.

In terms of their performance over the last few months, while I was talking about the sector having seen a downturn over the last couple of months, Jaguar Land Rover has reported decent growth over the last couple of months and has been gaining market share in some of the markets, especially in the UK. In that context, they seem to be outperforming the industry, at least in the last few months. And in that context, given their outperformance over the last few months and their fairly conservative guidance, we don’t think there is a material risk to the guidance that they have given and we still prefer the stock. The risks would certainly start to emerge from the perspective of fiscal year 2026, how that plays out, but that is still a bit far away to be making a decision this early. As far as the domestic market is concerned, there is also pressure due to inventory build-up. What do your channel checks suggest? How is the inventory level increasing in the domestic market? Also, you must have spoken to several distributors, what are they telling you? What kind of enquiries are they seeing ahead of the festive season?
Kumar Rakesh: In the domestic market we have also seen a period of very strong growth over the last two to three years post-COVID. There was very strong pent-up demand and that is something that drove very strong sales and the mix also improved in the industry. At the same time, there were also supply constraints and therefore inventory levels had really come down. To keep the context, we are coming from the other side of the extreme where demand was really strong but supply was constrained and you typically see that when mean reversal happens and things normalise, it usually doesn’t stop at the mean to begin with. It swings the other way first and that is something we are currently seeing – as production has started to improve across all OEMs while demand has moderated, we have seen a shift on the other side where there is inventory build-up across most OEMs and that has started to result in some of the discounts increasing as well so that is something we are also picking up from our channel checks, that system inventory has definitely increased. Discounts have increased.

Some of the companies have also officially announced price cuts, especially in electric vehicles, following the moderation in demand in India. But we would not say that, especially in India, this is a structural problem from a demand perspective. We believe that it is more of a demand-supply adjustment that will take a few quarters to be considered a structural weakness.

Is inventory high in the commercial vehicle segment? Is inventory high in the passenger vehicle segment or in the two-wheeler segment, which is the segment that is experiencing the highest inventory pressure?
Kumar Rakesh: So, the passenger vehicle segment definitely has high inventory levels. Two-wheeler companies have started increasing their inventory but the demand has also been relatively strong, so the inventory pressure does not seem to be as high as it is for passenger vehicles in the beginning. Commercial vehicles do not have such a huge inventory pressure so far. But there is also an expectation of an improvement in the second half as government expenditures start to pick up and hence the concern in that sector is also not as high from an inventory perspective.

What is your main recommendation regarding the sector? I ask you this because, of course, within the automotive sector there are several segments. For someone who is at the forefront when it comes to electric vehicles, commercial vehicles, photovoltaics and two-wheelers, what do you find interesting at the moment in the automotive sector from a risk-reward perspective?
Kumar Rakesh: Maruti Suzuki is our top pick from the sector from a long-term perspective. The stock has not seen much movement in the last few months and the valuations look quite attractive and the expectations are also quite subdued from the company. Hence, we believe it is a good situation for the company to surprise positively with its earnings. Since the valuations are really low relative to its history, there is a chance of seeing an outperformance from the company.

For two-wheeler stocks, we are concerned about the second half when the base starts to get tougher for the industry and how growth will be sustained, especially in the context of valuation, which has been stretched. From a cyclical perspective, we are more positive on commercial vehicles, especially Ashok Leyland. That is our cyclical pick and we believe that the heavy commercial vehicle segment has likely entered a next bull cycle and Ashok Leyland should be a key beneficiary.