Maruti, Mahindra to Hero MotoCorp, Sharekhan highlights key monitorable in the season of lights

October is set to be the second consecutive month of positive growth for all automotive companies (except CV makers). A pick-up in economic activity post the government’s Unlocking measures, pent-up demand and rising preference for personal transport would boost volumes. Moreover, wholesales are likely to improve as OEMs stock up channel inventories amid the commencement of key festive season in mid-October.

Passenger vehicle (PV) sales volumes are expected to continue double-digit growth, rising by 17% in October (as compared to a 29% growth in September 2020). Strong pick-up in retail sales volumes (key auto companies have reported 25-40% growth in Navratri period) due to increased preference for personal transport and onset of key festivals of Navratri and Dussehra are expected to drive growth.

Two-wheeler volumes would also continue double-digit growth with a 10% YoY increase expected (as compared to a 12% growth in September 2020). Two-wheeler sales are expected to improve primarily, driven by channel filling amid the festive season as retail sales are still lower YoY (retail sales have declined by about 6-7% in Navratri).

Commercial vehicle sales are expected to rise marginally led by improving economic activities owing to unlock measures. Tractor volumes are expected to decline by 2% YoY (as compared to a 15% YoY growth in September 2020) due to a delayed Diwali season and production constraints for the OEM’s. Retail sales are strong owing to robust farm sentiments on account of bountiful rainfall and expectations of a higher kharif output.

Retail sales in the festive season are expected to improve as compared to Q2 FY21 levels. As per initial estimates of Navratri and Dussehra festival, while passenger vehicle retail sales have grown in double-digits, two-wheeler sales have been lagging with retail sales being lower on YoY basis. Retail automotive demand in the entire festive season spanning October to mid- November would be the key monitorable.
Auto Sector view:

FY22 likely to witness strong recovery; retain positive view:

Automotive volumes declined in FY20 due to slowing economic growth, increased cost of ownership due to mandatory insurance and safety regulations & implementation of BS-VI emission norms. Growth in FY21 would be impacted by economic slowdown on account of COVID-19 and Sharekhan expects a double-digit drop in automotive volumes (excluding tractors). After two consecutive years of a decline, Sharekhan expects a strong recovery from FY22. Expected normalisation of economic activities and pent-up demand are likely to lead to strong double digit volume growth. Strong volume growth would drive up earnings as well as valuation multiples.

Key risks:

1) Prolonged COVID-19 infections in India
2) Delayed recovery in economic growth and consumer sentiments.

Preferred picks:

In the OEM space, Sharekhan prefers rural centric companies with a strong balance sheet such as Hero MotoCorp, Bajaj Auto, and M&M. In the auto ancillary space, Sharekhan likes agri plays such as Balkrishna Industries, Mayur Uniquoters (due to strong cash balance leadership in the artificial leather industry), Bosch and Schaeffler (due to increased content per vehicle under BS-VI norms), and Suprajit Engineering (on account of increased share of business with clients and new client addition).

Sector-wise expectations:

Two-wheelers: Double-digit growths to continue as inventories fill up; retail demand lower YoY

Two-wheelers wholesales are expected to grow in double-digits in October 2020 as well. Sharekhan expects the industry to grow by 11% in October. OEMs have built-up inventories in early-October ahead of key festivals of Navratri and Dussehra that began in mid October 2020. Inventory levels have reached 6-7 weeks, as is the norm before the start of the festive season. As per the Federation of Dealers Association (FADA), two-wheeler retail sales have been lower on a YoY basis this Navratri season. Sharekhan expects retail sales would be lower by 6-7% in the initial festive period of Navratri.

Passenger vehicles: Strong growth to continue driven by healthy retail demand and channel filling

PV sales are likely to report strong double-digit growth of 17% on YoY basis in October 2020 after a 29% YoY rise in September 2020. Š Retail demand has picked up driven by preference for personal transportation. In the festive period of Navratri  / Dussehra), retail sales are estimated to have grown in double-digits. Players like Maruti Suzuki, and M&M have indicated 38-40% growth in deliveries / bookings on YoY basis during Navratri. Inventory filling ahead of the festive season is also expected to drive volumes. PV players, including foreign OEMs, have started introducing products to woo consumers. OEMs have introduced innovative financing schemes (where upfront payment is less) to woo customers in difficult times of COVID-19. Companies have also introduced car subscription schemes (no down payment needed), allowing consumers to use vehicles for tenures ranging from 12 months to 48 months after payment of a fixed amount per month.

Commercial vehicle segment: Sales to continue to improve; expect flattish sales in October

With the government unlocking the economy, businesses are ramping-up operations, which would result in continued improvement in CV volumes. CV volumes are expected to be flat (1% YoY growth) as compared to 3% YoY drop in September 2020. Light and intermediate CVs as well as tippers are witnessing faster improvement.  The Medium and heavy commercial vehicle segment’s decline is expected to narrow to 22% YoY in October, as compared to a 24% YoY drop in September 2020. The Light Commercial Vehicle segment is expected to grow by 7% YoY in October 2020 as compared to 2% YoY growth in September 2020.

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Tractors: Sales to decline marginally given production constraints and a delayed Diwali; retail demand robust

Tractor sales are expected to decline marginally by 2% YoY in October 2020. Tractor industry had grown by 15% YoY in September 2020. Companies are operating at almost full capacity currently and are facing constraints to enhance production. Also, festive billing is expected to spread over September-November as compared to September-October period last year on account of a delayed Diwali (November this year as compared to October last year). Retail demand remains strong, given the bountiful monsoon (has been 10% above normal). Kharif foodgrain production has been pegged at record 144.52 mn tonnes this year as compared to 143.38 mn tonnes last year which along with increased MSP prices is expected to result in better cash-flow for farmers.