Hero MotoCorp, TVS Motors, Bajaj Auto to Mahindra – Rural India continues to steer sales

Sharekhan highlights that the automobile sales volumes were below expectations in November, as the festive season ended. Most OEMs, however, gave a positive outlook for the industry, says a Sharekhan report. Tractor sales surged 49.6% yoy, driven by higher farm incomes, a robust Kharif crop, good monsoons and benefits of a low base of the previous year. In the two-wheeler space, OEM sales grew by 12.6% yoy growth at 17.6 lakh units, aided by 14.4% growth in Hero MotoCorp’s sales and a 24.9% growth in TVS Motors sales. Hero MotoCorp’s management expects the demand to strengthen further due to growth in personal mobility post COVID-19 restrictions. However, Bajaj Auto witnessed demand slowdown in entry-level bikes.

Preferred picks:

In the OEM space, preference is for rural-centric companies with a strong balance sheet and thus recommend Hero MotoCorp, Bajaj Auto, and Mahindra abd Mahindra. In the auto-ancillary space, preference is for 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).

The domestic passenger vehicle segment clocked 12.5% yoy growth, despite flat growth reported by Maruti Suzuki. Stance is maintained on the overall sector and expect domestic sales volumes to regain momentum from Q4 FY21 onwards. Channel checks suggest higher offtake from semi-urban, Tier-2 and Tier-3 cities. Commercial vehicle sales are improving sequentially driven by a recovery in economic activities, revival of the infrastructure sector and improvement in consumption of petrol/diesel.

Sector-wise performance:

Two-wheelers:
Two-wheeler domestic sales registered 12.6% yoy in November driven by higher offtake from semi urban, tier-2 and tier-3 cities. Hero MotoCorp, Bajaj Auto and TVS Motor registered y-o-y growth of 14.4%, 12.1% and 24.9%, respectively. Royal Enfield (RE) reported 5.6% yoy growth in November, lower than expectations. Supply chain issues continue to disrupt demand for RE. However, Sharekhan expects supply chain issues to ease in the second half of FY21E and expect sales to improve aided by new launches. Royal Enfield recently launched Meteor 350 and received encouraging response from customers. Two-wheelers exports remained strong in November. Export of TVS Motor, Bajaj Auto and Hero MotoCorp registered yoy growth of 10%, 17.8% and 40.4%, respectively.

Passenger vehicles:

Domestic passenger vehicles registered 12.5% yoy growth at 272000 units in November on back of strong sales reported by Hyundai, Kia Motors and Honda Motors. Maruti Suzuki reported flat domestic sales in November, while exports grew by a robust 29.7% yoy. Flat growth in domestic sales was on the back of a 15.1% decline in mini cars and 1.8% decline in compact car segment. Hyundai Ciaz saw a rise of 29% in volumes.

Tractors:

Tractor sales continue to grow with strong volume numbers, with M&M’s and Escorts’ combined sales recording a 49.6% yoy growth. Rural and farm sentiments continue to be robust due to higher farm income, strong kharif sowing and a good monsoon. M&M reported 55.6% yoy growth at 32.6k units in tractors aided 54.9% growth in domestic sales and 79.4% growth in exports. Escorts reported a growth of 33% yoy in November, driven by 31% domestic growth and 91% growth in exports.

Commercial Vehicles:

Commercial vehicle sales are improving sequentially driven by a recovery in economic activities, revival of the infrastructure sector and improvement in consumption of petrol/diesel. The LCV segment is driving the growth for commercial vehicle sales. The M&HCV segment witnessed 5.6% yoy growth, ahead of consensus estimates. Ashok Leyland reported 4.8% yoy growth in November, with M&HCV sales clocking a decline of 14.3%. The LCV segment grew 31.7% yoy this month. A similar trend was witnessed in Eicher Motors’s CV sales, where LCV volume sales grew 16.1% yoy in November. Bus sales fell by 60.9% yoy. Heavy truck sales saw a growth of 3.5% yoy.

Key risks:

A second wave of COVID-19 infections may disrupt supply chains and affect the recovery momentum.