Hero MotoCorp, Ashok Leyland, Tata Motors, Escorts, Maruti Suzuki share prices II Heading South or North?

Auto Sector Q3 FY21 was a strong quarter for both automobile and auto-ancillary companies, as expected. Sales as well as operational performance improved, with some companies reporting their highest-ever quarterly sales and profits. Q3 FY21 was a strong comeback after a clean washout in Q1 FY21. A shift towards digitalisation, controlling of administrative costs, focus on core business, expansion of business through product innovations were the key factors that resulted into superior results.
 
The Sharekhan universe of Auto companies saw net profits grow by 50.5% yoy in Q3 FY21, as revenues grew by 12.6%, while EBITDA margins rose by 297 bps. An improvement in operating profit margins was common to most companies, despite the sharp run-up in key commodity prices such as steel, aluminium, copper, rubber, lead prices, rhodium and others that are used in the automobiles sector. Operational performance improved largely led by a better product mix, lower fixed costs, efficient working capital management and prudent capital allocation.
 
Sharekhan expects growth momentum to continue driven by pent-up demand, preference for personal mobility and faster-than-expected recovery in infrastructure, mining and other economic activities. Operational performance is likely to remain strong in Q4FY2021 led by benefits from operating leverage, cost-cutting measures and better export scenarios. The government’s push to the ‘Make in India’ and ‘AtmaNirbhar’ programmes, production-linked incentive (PLI) scheme, scrappage policy and thrust to rural and urban development are expected to keep the automobile sector buoyant.
 
Preferred Picks: Hero MotoCorp, Bajaj Auto, TVS Motor, Maruti Suzuki, M&M, Bosch, Schaeffler India
 
Leaders for Q3 FY21: Ashok Leyland, Tata Motors, M&M, Maruti Suzuki, TVS Motor
 
Laggards for Q3FY21: Exide Industries, Greaves Cotton
 
During Q3FY21, rural sentiments were strong on account of good monsoon, increased kharif sowing and increase in farmers’ incomes. The demand was primarily led by semi-urban, rural areas, tier-2 and tier-3 cities. Moreover, companies having a strong presence in rural India witnessed strong demand. Companies such M&M, Escorts, Hero Honda and Maruti Suzuki performed well. Exports also grew well where vehicle sales normalised. OEMs such as Bajaj Auto, TVS Motor and Maruti Suzuki were the key beneficiaries.
 
Auto component companies also witnessed robust export demand and a few companies outperformed domestic markets. During the second half of the Q3 FY21, commercial vehicles saw strong growth momentum, as activities in the infrastructure sector picked up strongly. The leaders of the CV industry, Tata Motors and Ashok Leyland are expected to deliver strong earnings growth driven by volume growth, operating leverage, cost cutting measures and low base.
 
Key Risks for the Auto Sector:
 
Rising commodity prices and a shortage in supply of micro-processor semiconductors continues to be potential risk going forward. Moreover, exports continue to remain a strong contributor to domestic industry and thus, have exposure to global macro environment and forex fluctuations.