Why Motilal Oswal Is Overweight On Auto

While earnings were in line with expectations for Nifty and broader market, auto and financials grew the most, according to Gautam Duggad of Motilal Oswal Financial Services Ltd.,

The only refreshing change in the last two quarters has been that auto has started contributing, said the head of research, institutional equities, Motilal Oswal told BQ Prime's Sajeet Manghat.

"However it would be good if more sectors are contributing to the earnings growth, because if it is led by only few sectors for a long period of time then markets tend to be discounting earnings," he said.

Auto reported flat earnings in the last five years, and FY23 was the first year after a really long time that earnings saw a growth, Duggad said.

"We do expect this momentum to sustain because two-wheelers, four-wheelers and CV cycle is good right now," he said. "The demand looks strong and order books are looking very healthy. The supply situation which was impacted in FY21-FY22 has eased out now."

Auto earnings can have a very strong year in FY24, according to Duggad. "We are expecting the auto earnings to almost double in the next two years, between FY23-FY25 and it will keep contributing to the broader index."

Duggad remains optimistic on public sector unit banks. "We have State Bank of India and Bank of Baroda in our portfolios and we are keeping the weights intact".

He expects the profitability of PSU banks to remain very strong over the year. "We have an overweight call on financials and a big overweight on PSU banks, with marginal overweight on private banks, and slight underweight on NBFCs [non-banking financial companies]".

Net interest margins are expected to moderate because of repricing on liabilities happening instantly, Duggad said. "As we move forward in FY24, in subsequent quarters we will see NIMs moderating by 20-30 basis points, depending on the banks."

However, even then NIMS will be strong, as FY23 and last part of FY22 saw substantial expansion in that regard, he said. "Even if they will correct by 20-30 basis points, at an absolute level, they will be still very chunky and healthy."

Metal is a global sector and things depend on how global macro pans out, according to Duggad. "In FY23 we have already seen commodities price getting corrected after initial flare-up during the Russia-Ukraine crisis," he said.

From the point of view of stocks performance, it will be premised on two-three things, how China behaves, how global narrative shapes up and company specific factors.