Hero MotoCorp, Bajaj Auto, Maruti Suzuki, Mahindra and Mahindra, Balkrishna | Sharekhan preferred picks

After signs of a strong recovery in Q2 FY21, automobile companies are expected to clock strong and steady earnings growth in Q3 FY21. Sharekhan’s coverage universe is expected to record a strong 19.3% yoy revenue growth driven by pent-up demand, festive season sales, and preference for personal mobility amid Covid-19 and faster than expected recovery in infrastructure, mining and other economic activities.

Sharekhan expects operational performance to continue to improve in Q3 FY21 led by benefits from operating leverage, cost-cutting measures and an improving export scenario. Sharekhan expect operating profits of automakers’ companies under coverage to grow by 49.4% yoy in Q3 FY21. During the quarter, Sharekhan witnessed strong rural sentiments on account of a good monsoon, increased kharif sowing and higher farm incomes.

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Demand was primarily led by semiurban, rural areas, tier-2 and tier-3 cities in the quarter. As a result, Sharekhan saw strong demand for tractors in the farm sector. Moreover, companies with a strong presence in rural India witnessed strong demand. Companies such as M&M, Escorts, Hero Honda and Maruti Suzuki performed well. Growth also emerged from the export markets, where vehicle sales normalised.

OEMs such as Bajaj Auto, TVS Motor and Maruti Suzuki were beneficiaries. Auto component companies also witnessed strong export demand and a select few companies outperformed domestic markets.

During the second half of the Q3 FY21, the commercial vehicles segment saw strong growth momentum, as activities in the infrastructure picked up strongly. There is a strong sign of revival growth for the commercial vehicle industry, which was having a tough time over the last couple of years. The leaders of 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:

Steep rise in raw materials from here can slow down the growth momentum in automobiles. Also the second wave of COVID can impact mobility and thus impede growth.

Preferred Picks:

Hero MotoCorp, Bajaj Auto, Maruti Suzuki, Mahindra and Mahindra, Balkrishna Industries, Bosch, Schaeffler India.

Q3 FY21 Leaders: Ashok Leyland, M&M, Maruti Suzuki, TVS Motor

Q3 FY21 Laggards: Greaves Cotton