"The domestic auto sector is in a sweet spot, riding anticipated cyclical recovery and rising structural tailwinds. More importantly, few players have established a decisive lead and are set to further fortify their position over the next 3-5 years. Our category-wise deep dive analysis makes us believe that: (a) Maruti Suzuki’s (MSIL) dominance in PVs will rise further reaping benefits of the widening gap versus peers on all fronts – operational, financial and products; (b) Eicher Motors (EIM) and Honda Motorcycle (HMSI) are striding a multi-year demand up-cycle (shift in preference plus extremely low penetration) in >250cc motorcycles and scooters respectively, owing to their first-mover advantage; and (c) Ashok Leyland (AL) may dethrone market leader Tata Motors (TTMT) in M&HCVs. That these gains are backed by rising profitability & cash flows and the sector is an early cycle play, should only raise their valuations. We believe that the traditional auto sector valuation framework is undergoing a change, reflecting business dynamics (growth and cash flows), individual company domination and prospects, and drawing parallels with consumer facing businesses across sectors (from banking to commodities). We believe, this convergence of cycle, structure and businesses will drive AL, EIM and MSIL to newer highs. We advise investors to hop on for the joy ride."
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