Auto Stocks: Heads-up on Tata Motors, Maruti, Mahindra & Mahindra

Hyderabad: Tata Motors Group (Tata Motors) is a leading global automobile manufacturing company with about 70% of its turnover coming from outside India. Its diverse portfolio includes an extensive range of cars, sports utility vehicles, trucks, buses and defence vehicles.

Mahindra, originally called Muhammad and Mahindra, was established in 1945 by the brothers JC Mahindra and KC Mahindra, and Malik Ghulam Muhammad.

Maruti Suzuki holds the number one position in the passenger vehicle segment in India. All the three stocks are now coming out of very stressed times induced by Covid, inflation, chip shortage and the Ukraine war leading up to a period of tough financial contraction. The coming years could see normal to above normal improvements in business performance. The Indian market is likely to grow faster in the coming quarters compared with the world market. This is likely to help M&M and Maruti Suzuki more as they are almost India-centric.

Tata Motors, on the other hand, is only about 30% India operations. To the extent of its Indian operations, Tata Motors too would benefit. But it may find headwinds in its global operations which account for nearly 70% of its revenue.

Likely Shift
A moderation in commodity prices as also mitigation in the chip shortage is likely to ensue in the coming quarters improving margins for all auto stocks. Another change that is being witnessed in the Indian auto market is that there is a shift happening to bigger and more expensive cars/vehicles from smaller and less expensive ones. This change is likely to help M&M and Tata Motors more at the expense of Maruti Suzuki. Also, the EV roll-out of these stocks should be studied carefully.

All the three companies should in the coming quarters see a very substantial uptick in both sales and profitability helping them turn out healthy earnings per share (EPS).

Due to these factors, it is likely that M&M would have a very major PE (price-to-earnings is the ratio of the share price of a stock to its EPS) rerating while Tata Motors’ India operations too will help in its PE going up. Here it is worth noting that Internationally the PE for major passenger vehicle manufacturers is much less, say just about in double digits. So for Tata Motors as about 70% of its operations is global, it will have to be valued for its international business at a lower global PE. Maruti Suzuki which now enjoys a very rich PE of about 60 should see a substantial PE contraction.

Finally, it is very important to have a long-term perspective with respect to stocks. While a lot could happen in the short term, in the long term say about June 2024, I see both Tata Motors and M&M rewarding their investors handsomely while Maruti Suzuki is likely to be only a market performer.

(Please do your research before making any decision)