Analysts cautious on road ahead for auto sector despite July sales recovery

Sales of automobile companies recovered in July after a subdued couple of months as Covid-19 triggered a nation-wide lockdown. India’s largest carmaker, Maruti Suzuki for instance, said it had sold 108,000 units in July, 88.2 per cent more than June 2020, and 1.3 per cent more over July 2019. The automaker had reported zero sales in April due to the lockdown. 


In the two-wheeler category, the combined July wholesales of Hero MotoCorp, Honda, Royal Enfield (RE) and TVS fell 15% YoY, according to reports, but still are better than the 39% YoY fall in industry volumes in June 2020.

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“The Indian auto industry, while still reeling under COVID-19 impact, saw a significant sequential improvement in July sales. Production ramp-ups, easing base of last year and channel restocking resulted in much better YoY prints for July compared to June. Tractors are leading the recovery, followed by passenger vehicles (PVs) and then two-wheelers (2Ws), while trucks continue to lag,” wrote Nitij Mangal, an analyst tracking the sector at Jefferies in an August 2 co-authored note with Sagar Sahu.


At the bourses, auto stocks have been in top gear. The Nifty Auto index – a gauge for performance of the auto sector companies on the National Stock Exchange (NSE) – has surged 56 per cent since March 2020 low as compared to 43 per cent rise in the Nifty50 index. All stocks that comprise the Nifty Auto index have gained ground since then with Mahindra & Mahindra (M&M) moving up 104 per cent since then, ACE Equity data show.

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For the auto sector as a whole, analysts now expect polarisation to get more entrenched where rural-focused plays like M&M, Escorts etc to do well as compared to the PVs and commercial vehicle (CV) manufacturers. That said, micro lockdowns in specific areas remains the key headwind for sustainability of demand. Analysts at Nomura, for instance, expect rural demand to stay strong due to the benefit from a 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 fiscal (H2FY21), as initial pent-up demand fades (around 20% 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 co-authored report.

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Among the stocks of auto ancillary companies that comprise the Nifty Auto index, Balkrishna Industries, Amara Raja Batteries, Motherson Sumi Systems, Bosch and Exide gained in the range of 16 – 87 per cent since their March 2020 low. Stocks of leading auto manufacturers such as Maruti Suzuki, Tata Motors, Hero MotoCorp, Eicher Motors, Bajaj Auto and Ashok Leyland gained in the range of 36 per cent to 71 per cent, ACE Equity data show.


“July 2020 dispatches are a sign towards expected normalisation. However, we believe OEM’s are also planning to raise channel inventory for the upcoming festive season. Thus, we expect wholesales to remain firm for next few months in anticipation of continued improvement in retail trends. The retail data emerging in October/November 2020 would provide a clearer trajectory towards future wholesale trend from OEM’s. Key risk remains further lockdowns, which could cause economic activity to slow down,” wrote Nishant Vass and Pratit Vajani of ICICI Securities in an August 2 co-authored note. table