Dread it. Run from it. Destiny (earnings) still arrives.
* Shutdown leads to unprecedented financial impact: The auto industry saw slump in wholesale dispatches due to the nationwide lockdown leading to no production and sales for first six weeks of Q1FY21 and restricted activity for the latter part of the quarter. CV’s fared the worst with M&HCV volumes declined (down >95% YoY) while 3W volumes were down ~75%. On consumer side, 2Ws fared better (~70% decline) than PVs (~80% decline) due to resilient rural demand coupled with release of pent up demand in Jun’20. Tractors were the lone bright spot witnessing a V-shaped recovery (only ~20% drop). Across our coverage universe, amongst OEMs, 2Ws are likely to witness lowest financial impact due to lower fixed costs nature of business while PAT losses are likely to be the norm. Balkrishna Industries is the only coverage stock expected to post earnings growth (2%).
* Consumer sentiment remains weak while OEM’s try to fix financing issues: During the quarter, we witnessed that: a) retail demand trends remain modest due to lack of regular business activity in containment zones, which accounted for ~1/3rd sales, and b) OEMs have doled out incentives to spur demand, have tied up with financial institutions to provide flexi credit support schemes as tighter credit clearance norms are further likely to impact demand recovery
* Margin pressures to sustain as frequent start-stops to impact productivity: Weaker product mix, low operating utilisation and continued production start-stops across regions are likely to keep operating margins in check. We expect a few replacement segment/Agri focused companies to do relatively better than others. Amongst OEMs, Bajaj Auto is likely to register the lowest PAT decline at 48% YoY driven by export resilience.
* Key factors to watch: 1) Sustenance of pent-up demand and outlook for upcoming festive season, and 2) new cost initiatives undertaken to protect margins.
* Our view: We expect demand recovery to remain driven by rural markets which have higher income visibility due to better MSPs for the upcoming kharif harvest. Also, increased MNREGA spends in allied business activities (e.g. construction), could further boost rural cashflows, hence our relative preference for tractors, 2Ws vis-a-vis PVs, CVs stays
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