The outbreak of the novel coronavirus (COVID-19) and the 21-day national lockdown announced to stem its spread have brought the auto space nearly to a halt. The automakers who were already struggling with a slowing economy -- the GDP growth slowed to nearly 7-year low of 4.7 per cent in Q3FY20 -- and transition to BSVI emission norms have now been hit by a Black Swan event the extent of whose impact is still undefined.
According to an estimate, the country’s automobile sales were down by an average 64 per cent in March. The bleak scenario is reflected in the automakers' stock price, too, which have tumbled in the last two months. The Nifty Auto index has plunged 41.7 per cent since February 3, 2020 as compared to 29.5 per cent fall in the Nifty50 index. Has the recent fall turned some auto stocks into bargain buys or should investors stand on the sidelines for now, here's what the top brokerages say:
Disruption in wholesale dispatches due to the COVID-19 lockdown was far higher than our estimate. Bulk of the billing happens towards the latter part of the month, which was adversely affected by the sudden lockdown from 25 March. Apart from this, transition to BS-6 and supply constraints affected volumes, especially for two-wheelers (2W) and medium heavy commercial vehicles (MHCVs). While there have been some concerns regarding suppliers’ working capital, so far most of the OEMs have not changed their payment terms, though there have been news reports of delays in payments. A few OEMs, among them Hero Motocorp (HMCL), have staggered payments to large vendors. Vehicle registration data for March 2020 indicates double-digit year-on-year growth in 2Ws and MHCVs, indicating a large part of older BS-4 inventory has got liquidated. Due to the ongoing countrywide lockdown till 14 April and a possible extension, near-term volumes might remain volatile, in our view.
March 2020 was a near washout for the domestic auto industry as volumes crashed across OEMs and segments. The spread of Covid-19 in India along with proactive nationwide lockdown necessitated to combat it resulted in suspension of manufacturing facilities in the latter half of the month, hurting production and dispatches. At the retail level, closure of showrooms took a heavy toll on registrations despite hefty discounting amid what is normally a festive period in some regions. This Black Swan event coincided with the transition to BS-VI emission norms thereby affecting liquidation of BS-IV inventory as well as ramp up of BS-VI production. Wholesale dispatches were down anywhere between 40 per cent and 90 per cent YoY, with OEMs better placed on BS-IV inventory front outperforming relatively.
In the 2-W pack, Bajaj Auto outperformed (2-W volumes down 34.8 per cent) despite a 55.3 per cent fall in domestic sales as exports rose 8.9 per cent YoY. Industry leader Hero MotoCorp’s total volumes for the month were down 42.4 per cent YoY to 3.34 lakh units. Unaffected by BS-VI switchover, the tractor segment remained a relative outlier. Market leader M&M’s total volumes fell 30.9 per cent YoY to 13,613 units while Escorts volumes fell 54.3 per cent YoY to 5,444 units.
The brokerage has a 'Buy' rating on three companies in the auto space: Maruti Suzuki, Mahindra & Mahindra, and Tata Motors. In the case of Maruti Suzuki, the brokerage has the target of Rs 5,900 although it estimates the company's FY21 volumes to decline around 2 per cent YoY (v/s earlier est. 8.5 per cent growth) due to the impact of COVID-19 related slowdown. "We are lowering our (earnings per share) EPS estimates for FY21/FY22 by around 24%/21% respectively to factor in for the impact of coronavirus on demand. The stock trades at 21.4x/15.8x FY21/FY22E earnings. Maintain Buy.", the brokerage said.
Besides, Mahindra & Mahindra is a buy with the target price of Rs 426 while Tata Motors has a target price of Rs 111. The brokerage has lowered EPS estimates for FY21 for the two companies by around 18 per cent and 94 per cent, respectively to factor in for the impact of coronavirus on demand.
The COVID-19 disruption could result in a longer wait for a recovery in auto demand. Along with this, the Indian auto industry is battling with the BS-IV to BS-VI transition. COVID-19 has presented two challenges for the transition: 1) Liquidation of BS-IV inventory and 2) Supply constraints of BS-VI components. The other major impact we see is increase in costs in the form of employee expense even for contract labours as the government has intervened and cautioned companies from cutting salaries and wages. We believe that the industry will take longer to see a revival in demand.
We have upgraded our rating to 'Buy' for Maruti Suzuki (from 'Sell' earlier), Bajaj Auto (from 'Accumulate' earlier) and Balkrishna Industries (from 'Accumulate' earlier). We have upgraded TVS Motor from 'Sell' to 'Accumulate'. We have cut our FY21E earnings for our coverage by 3 per cent - 45 per cent to incorporate COVID-19 related disruption and expectation of a prolonged slowdown. The recent meltdown in these stocks has brought the sector in the value zone for long term investors.