ICICI Direct - Auto Thematic: Stocks to benefit from cyclical uptrend...

Technically, auto and auto ancillary stocks have undergone a healthy retracement after strong up move during CY20. Most of the stocks have held their key support despite host of negative news flow owing to surging Covid-19 cases in India, thereby offering favourable risk reward. Auto Index has also generated a breakout above a falling channel containing last three months corrective decline indicting resumption of up move. Going ahead, We expect the auto space to resume its uptrend. In this report, we are covering Ashok Leyland and Minda industries as a proxy to the auto theme, both being resilient stocks within auto space.

Ashok Leyland

Technical View

The share price of Ashok Leyland has undergone healthy retracement over last three months retracing just 50% of its preceding up move (Rs. 87-138). The stock is seen resuming its primary up trend as it has registered a breakout above its falling channel containing its entire last three months corrective decline signalling resilience and offers fresh entry opportunity

Key point to highlight is that, over the past 14 weeks the stock has retraced just 61.8% of preceding seven week's rally (87-138). The slower pace of retracement above 20 weeks EMA signifies higher base formation and robust price structure

Fundamental View

- Ashok Leyland (ALL) is a pure play CV manufacturer, commanding ~16.3% domestic market share in the space as of FY21. The company has presence in M&HCV buses and trucks and LCV goods as well, with its market share in these categories standing at 38.2%, 28.2% and 11.8% respectively. They contributed to 5.6%, 45.8% and 48.3% of overall FY21 volumes respectively

- ALL is a prime candidate for the upcoming CV cycle upswing. We build ~35% volume CAGR, 38.5% revenue CAGR for ALL over FY21E-23E along with return to profitability by that time. At the current market price, the company currently trades at ~26x P/E on FY23E EPS of ₹ 4.6/share with RoE/RoCE inching towards the 20% mark by FY23E

Minda Industries

Technical View

- The Auto space, has undergone a healthy retracement over past 3 month within which Minda Industries has remained relative outperformer. The share price is seen resolving out of Bullish Flag continuation pattern indicating resumption of up leg

- Key highlight during entire rally since March 2020 low of Rs. 199, is that each correction has held rising 10-week EMA. During past three month corrective phase, share price maintained its rhythm and formed higher base at key average that coincides with multiyear breakout area around Rs. 460

- The stock has retraced its Jan-Feb 2021 rally (Rs. 400-612) by just 61.8% over 10 weeks. Shallow price retracement signifies a robust price structure

Fundamental View

- Minda Industries (MIL) is a leading auto ancillary with diversified presence across segments, products and clients. As of FY20, the company derived 51% sales from 2-W/3-W and 49% from 4-W. In terms of business verticals, switches, lighting, acoustics, light metal technology (LMT) and others formed 37%, 23%, 12%, 14% and 14% of sales respectively.

- MIL offers a prominent play on vehicular premiumisation in India and is seen continuing to outperform industry via kit value increase and new product additions. We build ~19% sales CAGR, ~75% PAT CAGR over FY21-23E. At current market price, the company currently trades at ~32x P/E on FY23E EPS of ₹ 17.9/share. It is seen clocking close to ~20% return ratios (RoE/RoCE) by FY23E

For details, click on the link below: Link to the report

Source : Equity Bulls

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