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Apr’21: Wholesales reflect the impact from COVID-19

PVs sailed on back of a strong order book; all other segments feel the heat PV wholesales came in line, whereas CVs/2Ws/Tractors were below our expectations. PV OEMs sailed through due to strong order book, whereas 2Ws (HMCL and RE), CV, and Tractors reflected the impact of the COVID-led lockdown and slowdown (where markets were open). PV volumes grew 6.5% CAGR (v/s Apr’19). MHCV/LCV/2W volumes declined by 27%/25%/18% CAGR (v/s Apr’19).

* 2Ws (HMCL and RE) –

Below our estimate, declined 18% CAGR (v/s Apr’19): Volumes fell 18% CAGR (v/s Apr’19) and 34% MoM. 2Ws sales were impacted due to the missed mini festive and marriage season, and the second COVID-19 wave hitting Tier II cities hard (main market for 2Ws) as highlighted in our previous note (Second wave strikes 2W markets harder). Volumes for HMCL/RE posted a 19.5%/8% CAGR decline over Apr’19 (down 35.5%/19% MoM).

* PVs –

In-line, grew 6.5% CAGR (v/s Apr’19): The demand momentum in PVs slowed due to the COVID-19 impact. However, a strong order book supported wholesales, resulting in a volume growth of 6.5% CAGR (v/s Apr’19). MSIL’s volumes were in line (+5.6% CAGR v/s Apr’19), but declined 4.4% MoM. MM’s volumes (including UVs and Pickups) fell ~6% CAGR (v/s Apr’19, -3.1% MoM). TTMT’s PV volumes continued their strong performance with 41% CAGR growth (v/s Apr’19, -15% MoM).

* CVs –

below our estimate, 26.2% CAGR decline (v/s Apr’19): M&HCV and LCV volumes were below our estimates. M&HCV/LCV volumes fell 27%/25% CAGR (v/s Apr’19) and declined 60%/56% MoM (seasonal impact as well). Volumes for AL declined 22% CAGR (v/s Apr’19, -51.6% MoM). TTMT’s CV volumes reported a 27% CAGR decline (v/s Apr’19, -59% MoM). VECV posted a 31.5% CAGR decline (v/s Apr’19, -69.3% MoM).

* Tractors –

below our estimate, up 1% CAGR (v/s Apr’19): Tractor volumes grew by 1% CAGR (v/s Apr’19, -20.3% MoM). The second COVID wave led to localized lockdowns affecting the supply chain. With farm fundamentals like a good Rabi crop and prediction of a normal monsoon in place, retail demand is expected to be strong for the upcoming pre-Kharif season. MM/ESC’s Tractor volumes fell 2%/15% CAGR (v/s Apr’19).

Valuation and view:

Increase in COVID-19 cases in Apr’21 impacted volumes across segments. Current valuations largely factor in a sustained recovery (our base case), leaving a limited margin of safety for any negative surprises. We prefer 4Ws over 2Ws as PVs are the least impacted segment currently and offer a stable competitive environment. We expect the CV cycle recovery to slowdown in the near term. We prefer companies with: a) higher visibility in terms of demand recovery, b) a strong competitive positioning, c) margin drivers, and d) Balance Sheet strength. MSIL and MM are our top OEM picks. Among auto Component stocks, we prefer ENDU. We prefer TTMT as a play on global PVs.

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