Bank of America upgrades Indian auto sector, sees more than 10% upside for two stocks

Published Wed, Oct 6 20217:30 PM EDT

Bank of America analysts are expecting India's auto sector to perform well in the next 12 months and recommended two stocks with more than 10% upside. Auto stocks in India have been lagging the market and other sectors. The National Stock Exchange's auto index has gained about 33% from a year ago, compared with a 54% rise in the benchmark Nifty 50 index or a 69% surge in the index for banking stocks. But in a report dated Sept. 29, BofA said that trend could reverse for auto stocks as the chip shortage and commodity headwinds start to ease. The global semiconductor shortage has hammered the auto sector, forcing automakers to cut production as supplies were diverted to consumer electronics at the start of the pandemic. Consulting firm AlixPartners predicts that the shortage will cost carmakers $210 billion in revenue in 2021. Lower commodity prices could also encourage new car purchases in the coming months. Oil prices surged this year as demand roared back, with crude benchmarks hitting multi-year highs this week. BofA's note added that a key metric to monitor will be demand, which usually picks up during India's festive period in the last quarter of the year. The bank had two "key picks" and sees more than 10% upside for each within the next 12 months. Bajaj Auto BofA analysts wrote that Bajaj Auto has exposure to the "right segments" of the market — premium, exports and e-scooters. The company's market share in India has grown and has "strong export growth prospects," the report said. It flagged downside risks such as a prolonged slowdown in India, currency volatility and crude prices affecting export demand as well as competition from electric car makers. The bank has a price target of 4,500 Indian rupees, up 19% from Wednesday's close. Hero Motocorp The analysts said motorcycle and scooter manufacturer Hero Motocorp has a compelling risk-reward ratio and is likely to see an uptick in demand during the festive period. Risks to the moderate growth outlook include extended weakness in demand for two-wheelers, capital commitment to its subsidiary Hero FinCorp, and disruption from electric vehicles — though the latter is unlikely to happen in the next two years, the BofA report said. It has a price target of 3,200 Indian rupees on Hero Motocorp, up 14% from Wednesday's close. Commodities and health care Bank of America said energy and metal companies could also see gains, while the health care sector may lag the broad market. Hindalco is BofA's "preferred pick" with a price target of 605 rupees, or an upside of 27% from Wednesday's close. The aluminum and copper manufacturer's earnings are set to rise as aluminum prices increase. The company is also in a better position than Chinese producers which face higher power costs, analysts said. Risks to the outlook include lower-than-expected aluminum prices, currency appreciation and lower demand for aluminum from automakers. On the flipside, higher-than-expected metal prices and rupee depreciation could send Hindalco's share price even higher. Separately, coal costs have risen due to a surge in demand and that could boost earnings or profits for companies such as Coal India and Tata Power , analysts said. Higher oil prices could hurt aviation, paint, fast moving consumer goods, truck operations and oil marketing companies because of increased costs, but can benefit container logistics firm Concor as well as upstream oil company ONGC , BofA said. Analysts also lowered health care from neutral to underweight because the risk of a third Covid wave is waning, and there has been "robust progress" on vaccinations.

Maruti Suzuki, Tata Motors and Mahindra & Mahindra reported higher car sales in March, wrapping up fiscal 2024 at record levels, monthly data from the automakers showed on Monday.

Amit Pasricha | IndiaPictures | Universal Images Group | Getty Images

Bank of America analysts are expecting India's auto sector to perform well in the next 12 months and recommended two stocks with more than 10% upside.