4 auto stocks to buy for gains of up to 71% listed as Angel Broking’s February top picks

1. Ashok Leyland: Buy for a target of Rs. 175

Demand for MHCV was affected post-release due to multiple factors including changes in Axel standards, price increase due to implementation of BS 6 standards, followed by sharp decline in demand due to the current Covid-19 crisis.

The CV segment has held up well in the current year despite the challenges and the improving business climate and infrastructure spending are expected to drive demand over the medium term. The bus segment is also expected to rebound in the future due to improved business for end users.

FY21 MHCV industry production volumes have been at the lowest levels seen in approximately 12 years and we believe the company is ideally positioned to capture renewed growth in the CV segment. We believe ALL will be the biggest beneficiary of the government’s voluntary scrapping policy and therefore rate the stock at a BUY.

2. Sona BLW: Buy for a lens of Rs. 959

2. Sona BLW: Buy for a lens of Rs. 959

Sona BLW is one of India’s leading automotive technology companies that derives approximately 40% of its revenue from battery electric vehicles (BEVs) and hybrid vehicles.

It provides electric vehicle differential assemblies and gears, BSG systems and electric vehicle traction motors to customers worldwide. ~75% of their revenue from the sale of goods in FY21 came from end use in overseas markets.

This global BEV segment has experienced the fastest growth and is expected to maintain high growth rates, which is positive for Sona BLW. Sona BLW holds a strong market share ranging from 55-90% for differential gears for PV, CV and tractor OEMs in India.

The company’s combined engine and transmission capabilities have helped it gain market share across all of its products, especially for EV/BEV-related products. Given the traction in the BEV/Hybrid Vehicle space, we believe Sona Comstar will continue to command a higher multiple, which is justified by a profit CAGR of around 49% over FY21-24E.

3. Ramkrishna Forgings: Buy for a target of Rs. 1545

3. Ramkrishna Forgings: Buy for a target of Rs. 1545

Ramkrishna Forgings (RKFL), one of the major forging players in India and among the select few with a heavy press, is expected to benefit in the near term from favorable demand prospects for the Medium and Heavy Duty Commercial Vehicles (M&HCV) industry in the country and in other key geographies. .

The company has gradually reduced its CAPEX in recent years, during which it has been affected by the downturn in the industry at certain times. With the end of the CAPEX cycle, the favorable medium-term outlook and with sufficient capacity in place, we believe that RKFL volumes would be able to post a volume CAGR of 29% over FY21-23E.

RKFL was able to add new products with higher added value. A better mix coupled with operating leverage is expected to result in an EBITDA margin improvement of approximately 550bps year-over-year in FY22E.

4. Suprajit Engineering: Buy for Rs. 520 lens:

Suprajit Engineering (SEL) is the largest supplier of automotive cables for domestic OEMs with a presence in both 2W and PV.

Over the years, SEL has grown from a single product/customer company in India to a diversified exposure which, coupled with its low cost player proposition, has enabled it to gain market share and increase activities of existing customers. SEL outperformed Indian Auto. in recent years (showing positive growth versus low double-digit declines for the domestic 2W and PV industry in FY21).

The company believes that consolidating vendors and adding new customers would help maintain the trend of market/portfolio share gains.

SEL has grown profitably over the years and as a result it has a strong balance sheet (net cash). We believe that SEL is one of the main beneficiaries of the ramp-up of OEM production around the world and is well insulated from the threat of electric vehicles (developing new products).

Its premium valuations are warranted in our view due to its strong outlook and blue-chip earnings quality.

Store Current price Target price Upside down
Ashok Leyland Rs. 126.4 Rs.175 38%
Sona BLW Rs.657.35 Rs.959 46%
Ramkrishna Rs.902.25 Rs.1545 71%
Suprajit Engineering Rs.329.35 Rs.520 58%
Warning:

Warning:

The stocks above are taken from Angel Broking’s February Top Picks Stock Report.

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