HSBC Global Investment Research has singled out Mahindra & Mahindra Ltd (M&M) and Tata Motors Ltd (TMCV) as its top two preferred auto sector investments. The foreign brokerage’s analysis prioritizes original equipment makers (OEMs) that combine reasonable valuations with a defensive revenue profile and strong long-term structural growth drivers, aligning with its ‘quality at a reasonable price’ investment philosophy.
Resilient Q1 Performance Despite Cost Pressures
Despite what HSBC described as an “extremely challenging cost environment,” most auto companies delivered a broadly resilient set of Q1 results. The report highlighted that many two-wheeler OEMs, in particular, managed to show minimal margin contraction, indicating effective pricing strategies and robust cost-control measures.
Companies like Bajaj Auto Ltd and TVS Motor Ltd benefited significantly from diversified revenue streams, bolstered by strong export performance and favorable currency movements. Eicher Motors Ltd also posted a robust quarterly performance.
Varied Performance Across Auto Segments
- Four-Wheelers (4Ws): Hyundai Motor India Ltd demonstrated unexpected resilience, surpassing expectations despite adverse market conditions. In contrast, Maruti Suzuki India Ltd and M&M experienced sequential margin declines, largely in line with market forecasts.
- Commercial Vehicles (CVs): CV OEMs generally reported reasonable quarterly results, with performance trends falling between those observed in the 4W and 2W segments.
Commodity Headwinds and Price Hikes
Commodity prices remain a significant pressure point for the auto sector. While a modest softening in commodity prices was noted in Q2, input costs have largely remained stable but continue to drag on profitability. In response, most OEMs implemented further price increases in July and August. HSBC anticipates these hikes will offer partial margin support, though their overall effectiveness will depend on demand elasticity and the pace at which commodity pressures ease.
Encouragingly, consumer demand has held firm across all segments, even following successive price adjustments. HSBC now projects a mid-single-digit growth for OEMs in the second half of the fiscal year, an improvement from earlier low-single-digit forecasts. The easing of monsoon-related risks has also contributed to improved market expectations. However, continuous price increases and challenging year-on-year comparatives remain key concerns for growth trajectories in FY27 and FY28, especially if consumer affordability comes under increased pressure.