ANALYSTS WARY DESPITE AUTO SECTOR’S JULY SALES RECOVERY
Rural-focused firms like M&M and Escorts expected to do well
Stocks of automobile companies have recovered sharply from their March low, with the Nifty Auto Index rallying over 55 per cent since then, compared to around 45 per cent rise in the Nifty50 index.
The optimism has stemmed from an uptick in sales figures. Maruti Suzuki, for instance, sold 108,000 units in July, an 88.2 per cent rise over June, and 1.3 per cent higher than July 2019. The automaker had reported zero sales in April because of the lockdown.
In the two-wheeler category, the combined July wholesales of Hero Motocorp, Honda, Royal Enfield, and TVS fell 15 per cent year-on-year (YOY), according to reports, but are still better than the 39 per cent YOY fall in volumes seen in June.
“The Indian auto industry, while still reeling from Covid19 impact, saw significant sequential improvement in July sales. Production rampups, easing base of last year, and channel restocking resulted in better YOY prints for July, compared to June. Tractors are leading the recovery, followed by passenger vehicles (PVS) and two-wheelers. Trucks continue to lag,” wrote Nitij Mangal, an analyst at Jefferies in an August 2 note co-authored with Sagar Sahu.
For the auto sector, analysts now expect polarisation to get more entrenched with ruralfocused plays like Mahindra & Mahindra and Escorts expected to do well, compared to the commercial vehicle (CV) manufacturers. That said, local lockdowns remain the key headwind for sustainability of demand. Analysts at Nomura, for instance, expect rural demand to stay strong due to healthy crop outlook and strong government support.
“We see more risks to urban demand due to a larger impact from wage reductions/deferral of pay hikes. However, a key risk to watch out for, especially in terms of urban demand, will be if the demand recovery can be sustained in the second half of the current financial year (H2FY21), as initial pent-up demand fades (around 20 per cent sales were lost from
March-may 2020) and the requirement of vehicles for avoiding public transport is fulfilled for those who can afford it,” wrote Kapil Singh and Siddhartha Bera of Nomura in an August 3 report.
Rising commodity prices, which, in turn, could dent margins in the absence of pick-up in volumes, are also worrying. Given the demand risk, especially in urban areas, a hike in vehicle prices to compensate for rising commodity cost is also ruled out, at least for now.
“Costs, on average, can rise between 10 per cent and 12 per cent for the players. Wage cost, too, can inch up. That said, one can’t paint the entire sector with the same brush. People will focus more on personal mobility and avoid public transport amid the Covid-19 pandemic. Two-wheeler and PV manufacturers should benefit. Affordability will be key. High-end cars and CVS will find fewer takers. Investors should remain selective and cautious,” advises A K Prabhakar, head of research at IDBI Capital.
Analysts at ICICI Securities, too, say the retail data emerging in October/november 2020 would provide a clearer trend regarding recovery. Key risk remains further lockdowns.