Hero MotoCorp, Maruti Suzuki, Mahindra to Tata Motors II Auto Sector to remain in focus this Budget

Sharekhan expects January 2021 to be another strong month for the automobile industry, with demand improving across all the segments, except the subdued growth in the three-wheeler industry. Sharekhan expects tractors and commercial vehicle sales to drive the growth in January 2021, with passenger vehicles and two-wheelers segments to register double digit growth. The rise in raw material costs over the last couple of quarters has led OEMs to take price hikes this month in the range of 2-5%, depending on the segment and model, except the three wheeler segment, where the demand is still sluggish.

The two-wheeler industry is expected to register growth of 9.7% yoy in January 2021, driven by exports, faster growth in scooters and bikes of 125cc+ segment. Sharekhan channel check suggests higher offtake from rural, semi-urban and urban areas.

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However, the North India’s rural and semi-urban areas continue to be impacted by the on-going farmer strike. Sharekhan expects export to be top contributor for the growth in January 2021, aided by strong sentiments in the export markets. The two-wheeler exports are expected to grow at robust 38.5% yoy, driven by TVS Motors’ 104.3% and Bajaj Auto’s 23.2%. The passenger vehicle industry is expected to grow by robust 11.2% yoy in January 2021, led by strong retail demand and new launches in the segment. Tata Motor’s is expected to grow by 94.3% yoy, while Maruti Suzuki is expected to grow by 6.2% yoy on large base.

Sharekhan expects the tractor industry to continue to grow robust at 16.5% yoy in January 2021, driven by improvement in farm income during the year. Rural demand is expected to be strong in the southern and western India, given higher kharif sowing and a copious monsoon, both of which are crucial for these regions.

However, the demand got impacted marginally due the on-going farmer protest in North India, especially in Punjab, Haryana and some parts of UP. We expect a strong sequential improvement in M&HCV sales, while yoy volumes are expected to show signs of growth, driven by rise in e-commerce, agriculture, infrastructure, and mining activities. Sharekhan remains positive on the sector and expects strong rebound in FY2022E, driven by increasing economic activities, improving sentiments of fleet owners, and lower cost of ownership under BS-VI vehicles.

Key risks in Auto Sector:

Rise in input costs and subsequent rise in vehicle prices can impact demand. Moreover, any delay in preparation of COVID-19 vaccination can impact demand.

Preferred Picks in Auto Sector:

Stocks of most automobile companies have seen a strong run up in the stock prices in the past six months due to faster than expected recovery in demand in the domestic market. We believe that volume growth seen in the automotive industry is likely to sustain in strong double-digits in FY22. Strong volume growth would drive up earnings as well as valuation multiples. Hence, Sharekhan retains a positive view on the sector.

In the OEM space, Sharekhan prefers rural-centric companies with a strong balance sheet and, thus, recommends Hero MotoCorp, Maruti Suzuki, and M&M. In the auto-ancillary space, Sharekhan like 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 additions).