Ashok Leyland, Hero MotoCorp, Maruti Suzuki - Sharekhan puts its money on these auto sector stocks

Six leading OEMs including Ashok Leyland, Hero MotoCorp, Hero Motocorp, Maruti Suzuki, Toyota Kirloskar Motor, and MG Moto have announced plant shutdowns in May, amid the second wave of rising COVID-19 cases. Brokerage firm Sharekhan expects the current COVID-induced restrictions in states to be a temporary phenomenon undertaken to arrest the rising COVID-19 cases. It is expected that COVID-19 cases will start to normalise gradually, it says.

Sharekhan sees positive sentiments in rural and semi-urban areas for Hero MotoCorp. In the PV space, the brokerage firm likes Maruti Suzuki and expects it to maintain its dominant market share and robust export growth. Sharekhan likes M&M, given its leadership in the tractor segment, and its continued strong performance in other segments such as LCV and UVs.  

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In the auto-ancillary space, Sharekhan likes 

-- Bosch due to its extensive network and brand equity
-- Sundram Fasteners which is as beneficiary of strong growth traction in CV, PV, 2Ws, and tractor and its strategy to de-risk business from cyclicality 
-- Suprajit Engineering on account of increased share of business with existing clients and new client additions
-- Gabriel India due to its leadership position and brand recall in the suspension components segment and focus on the e-mobility space)

Sharekhan says that in-line with expectations, automobile companies reported weak numbers in April 2021, marred by a sudden rise in COVID-19 cases, leading to partial lockdowns in multiple states or some parts depending upon the severity of the COVID wave. Volume numbers of April are not comparable on a yoy basis due to complete lockdown in April 2020.

Sharekhan is comparing growth on MoM basis, keeping in mind two-week partial lockdowns in multiple states. Within the automobile subsegments, passenger vehicles (PV) were least impacted, followed by tractors, two-wheeler (2W), commercial vehicle (CV), and three-wheeler (3W) segments in April. 
Exports continued to remain buoyant, helping original equipment manufacturers (OEMs) dependent on export sales. The restrictions imposed by states are currently impacting 30%-35% of total automobile sales and 20%-30% of dealerships are shut down.

Moreover, key auto manufacturers have announced facility shutdown for 1-3 weeks in May 2021, as a safety precaution ahead of rising COVID-19 cases. This is likely to affect automobile sales and production across segments in the near term. Channel checks suggest high dealer inventories from 3-7 weeks across segments. With the lockdowns expected to get extended for another 2-3 weeks, it is likely to impact 50%-60% of dealerships in the country. The wave-2 of COVID-19 will likely impact sales adversely in May 2021 as compared to April 2021.

During the first wave of COVID-19 last year, automobile companies had learned the hard way to improve operational efficiencies, which has led to strong foundations for a structurally improved operational performance in the long run. A shift towards digitalisation, controlling of administrative costs, focus on core business, and expansion of business through product innovations were key outcomes that we witnessed in quarterly results post the lockdowns.