- Morgan Stanley notes input cost rises and supply issues may pressure auto sector margins in Q1
- Volume recovery in auto sales is seen as key to offsetting cost pressures and supporting profits
- Morgan Stanley favors Mahindra, Maruti Suzuki, TVS Motor, and Hero MotoCorp with overweight ratings
Morgan Stanley has put out a note on the Indian automobile sector, sharing a rather positive stance even as the global brokerage firm cut target prices for several auto stocks, factoring in near-term margin pressures and rising risks.
In its latest note, the brokerage has pointed out multipel headwinds for the auto sector, including higher input costs, supply chain disruptions and tighetening regulatory norms. These potential risks could weigh on the gross margins of auto companies in the first quarter of the new financial year.
That said, Morgan Stanley said the ongoing volume up-cycle could go a long way in allowing original equipment manufacturers (OEMs) to gradually pass on higher costs, thus supporting profitability over time.
The brokerage maintained its 'attractive' view on the auto space, adding that volume recovery remains the key positive. As such, it continues to favour Mahindra & Mahindra, Maruti Suzuki, TVS Motor and Hero MotoCorp, all of which remain rated 'overweight'.
Going more stock-specific, Morgan Stanley has maintained an 'overweight' rating on TVS Motor, raising target price from Rs 4,280 to Rs 4,327. Hero MotoCorp also retained an 'overweight' rating with target price being raised from Rs 6,471 to Rs 6,537, whereas Maruti Suzuki saw a marginal target price hike to Rs 17,895 from Rs 17,804.
Eicher Motors was kept at “Equal-weight,” with the target price raised to Rs 7,763 from Rs 7,578. Bajaj Auto remained “Underweight,” though its target price was increased to Rs 8,920 from Rs 8,782.
On the downside, Ashok Leyland saw its target price cut sharply to Rs 180 from Rs 227, while retaining an “Equal-weight” rating. Mahindra & Mahindra, despite remaining a preferred pick, saw its target price reduced to Rs 3,919 from Rs 4,358. Hyundai Motor India also remained “Overweight,” but its target price was cut to Rs 2,114 from Rs 2,565.
Morgan Stanley believes larger OEMs with strong product cycles and pricing power are better equipped to navigate near-term challenges while benefiting from sustained demand recovery.
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