Whalesbook
Sectoral Challenges Intensify
Motilal Oswal has signaled growing difficulties for the automotive sector, even as demand momentum remains healthy through the fourth quarter. The main concerns stem from escalating geopolitical tensions in the Middle East, which pose risks to gas supplies and supply chains. While major companies have largely managed these disruptions so far, ongoing conflict creates an uncertain outlook for the coming months.
Input Cost Surge and Margin Pressure
A key factor to watch is the sharp rise in input costs across various commodities during Q4. This surge is expected to significantly affect corporate earnings from the first quarter of the next fiscal year. Furthermore, escalating crude oil prices represent a key risk to India's overall economic growth, which could disproportionately impact the commercial vehicle segment. Export-oriented companies are also facing increased freight costs, adding another layer of pressure.
Earnings Adjustments and Market Valuation
In response to these challenges, Motilal Oswal has made significant earnings revisions, implementing notable cuts for companies it covers, particularly for FY27 estimates over FY28. Firms like CEAT, Hero MotoCorp, and Apollo Tyres have seen substantial reductions in their earnings forecasts, with cuts of -22%, -16%, and -14% respectively. This adjustment reflects the sector's recent de-rating, with original equipment manufacturers (OEMs) experiencing a more pronounced valuation correction than auto ancillaries.
Top Stock Selections
Amidst this cautious environment, Motilal Oswal maintains a preference for companies with strong fundamentals, a robust new product pipeline, and attractive valuations. Maruti Suzuki India Limited, TVS Motor Company Limited, and Mahindra & Mahindra Limited are identified as the brokerage's top picks within the OEM space. For auto ancillaries, Motherson Sumi Wiring India Limited, Samvardhana Motherson International Limited, and Endurance Technologies Limited are favored.
The brokerage anticipates input costs stabilizing at lower levels in the latter half of the fiscal year, which could support margins.