Auto major Mahindra & Mahindra (M&M) has fallen 45 percent in the last 1 year and 34 percent since the beginning of this year amid weak consumer demand and high raw material costs. Motilal Oswal has picked this stock as its top contrarian bet.

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Contrarian investing is a time-tested investment tool, which involves buying/selling stocks that go against the prevailing sentiment of the crowd or the market.

The Nifty Auto index has fallen 35 percent in the last 1 year and over 23 percent in 2019 as compared to a 4.5 percent loss in benchmark Nifty in 1 year and a 1 percent rise in 2019.

Analysts expect all auto segments to continue facing demand headwinds, continuing the trend of weak retails in the previous quarter. Retail demand further deteriorated due to liquidity issues and weak consumer sentiment, they said, adding that margins will be under pressure across the board, led by higher discounts and negative operating leverage.

According to Motilal Oswal (MOSL), M&M’s stock price has significantly underperformed in the last five years (down 25 percent) as compared to Nifty 50 (up 40 percent) due to weakening competitive positioning in utility vehicle (UV) business, negative sentiments towards diesel and recent weakness in tractor volumes.

"We expect headwinds for both pick-up UVs as well as passenger UVs due to on-going weak demand environment as well as due to substantial price increase due to BS-VI compliance, though M&M might be relatively better placed due to cost optimisation efforts. M&M’s pick-up volumes are estimated to decline 4 percent CAGR over FY19-21E, whereas passenger UVs volumes are estimated to decline 8 percent CAGR over FY19-21," the brokerage said in a report.

However, it added that the UV segment is expected to outgrow PV industry over the next 3-5 years driven by the increasing acceptance of compact SUVs by car buyers.

Going ahead, with monsoons catching up, tractor business should see recovery in the second half of FY20. Also, M&M might be relatively better placed in large SUVs due to the optimisation of BSVI compliance cost, it added.

"M&M core business trades at implied valuations of 9 times FY21 price to earnings ratio, which is at a substantial decline to peers, offering an attractive entry point for contra investors. We believe the valuation gap would narrow once the growth returns back. Very cheap valuations for attractive core business would provide downward protection to the stock price," the brokerage explained.

MOSL has a 'buy' call on the stock with a target at Rs 645, estimating an upside of 22 percent.

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