Investment bank sees 'strong opportunity' for these Indian stocks ahead of auto boom

Published Fri, Jul 2 20211:03 AM EDTUpdated Mon, Jul 5 20217:36 PM EDT

Indian exporters in the auto industry are poised to win behind a recovery in vehicle demand around the world, according to investment bank Nomura. The Japanese bank sees "strong opportunity for global plays from India," and expects a "strong recovery in global automotive demand over 2021-22," analysts said in a report this week. Demand for vehicles has outpaced supply in markets like the United States . It comes as the auto industry faced disruptions from the pandemic last year, and a global shortage of semiconductor chips this year. Nomura expects a strong U.S.-led recovery in private vehicle sales, including luxury cars. It predicts that the share of electric vehicles and plug-in hybrid electric vehicles will rise sharply. Analysts from the bank pointed out that U.S. inventory levels are about 40% below normal and it could be the end of 2022 before they normalize. That means production will likely reach a new record next year. Here are five auto-related stocks in India that Nomura likes: Motherson Sumi Nomura has a "buy" rating on this Indian supplier, after upgrading the stock from "neutral." That implies the bank's analysts expect the stock to outperform the Nifty 50 benchmark index over the next 12 months. Motherson Sumi works with global automakers in areas like wiring harnesses, rearview mirrors, cockpits, bumpers and more. The company has the "highest exposure to global demand," Nomura analysts said, adding that about 89% of the company's consolidated revenue comes from its operations outside of India. "With rising (electric vehicle) share in its order book, it may continue to outperform industry volume growth and, hence, is our preferred pick in the sector." The investment bank's target price for the stock is at 301 Indian rupees ($4.05) a share, which implies a 23% upside from Thursday's close. Bharat Forge Nomura likes Bharat Forge due to a recovery in truck demand in the United States. The bank has a "buy" rating on the stock, with a target price of 924 Indian rupees a share, implying a near 21% upside. The U.S. government's $1.2 trillion infrastructure investment plan can potentially spur growth in U.S. demand for trucks and non-auto segments, the analysts said. They added that order inflow trends for Class 8 trucks in North America have remained strong and that uptick in demand is set to benefit both Bharat Forge and Motherson Sumi. The bank said Bharat Forge's new "lightweight forging business" for private vehicles and electric vehicles will likely benefit from strong global demand. Apollo Tyres A strong demand for original equipment in private vehicles has translated into strong U.S. and European demand for tires that need to be replaced, and that's set to benefit Apollo Tyres , according to Nomura. Demand for tire sizes larger than 18 inches was about 11% higher in the first three months of 2021 compared to the same period in 2019, before the pandemic, the bank said. About 35% of Apollo Tyres' sales come from that segment and the company "should benefit from a stronger revival in the segment." Nomura has a "buy" rating on the stock with a price target of 302 rupees a share, implying 32.5% upside. Bajaj Auto Nomura said it's positive on Bajaj Auto — one of the major manufacturers of motorcycles, scooters and auto rickshaws in India. That's in part due to a strong recovery in exports. Rising commodity prices are driving demand for two-wheelers in emerging economies, according to the bank. It said that six countries account for about 60% of India's two-wheeler exports and demand recovery has been the highest in Nigeria and Kenya. The company's "exports will continue to benefit from strong demand from oil/commodity-dependent economies." Bajaj Auto has a "buy" rating and Nomura's price target for the stock is 4,847 rupees a share, implying a 15% upside. Tata Motors Nomura upgraded the stock rating from "reduce" to "neutral" and said it expects the Indian automaker to benefit from the global demand and pricing environment. A neutral rating implies analysts expect the stock to perform in line with the Nifty 50 over the next 12 months. But the bank maintains long-term risks to Tata Motors from rising electric vehicle launches in the luxury segment in 2021 and 2022. Tata Motor is "likely to launch EV models on its new Born EV (BEV) platform only from 2024 onwards," Nomura said. Media reports said Tata plans to launch 10 electric vehicles across commercial and passenger vehicle businesses in India over the next four years. Nomura raised Tata Motors' price target to 353 rupees, implying an upside of about 2.5%.

Workers assemble wire harnesses at the Motherson Sumi Systems wiring harness plant in Faridabad, India.

Brent Lewin | Bloomberg | Getty Images

Indian exporters in the auto industry are poised to win behind a recovery in vehicle demand around the world, according to investment bank Nomura.