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Sector performance - August witnessed a good performance for the auto OEMs. On a yoy basis, the declines witnessed in FY 22 for the two wheeler sector are getting wiped off in the domestic markets, while all the three companies are witnessing weakening exports sales. Bajaj in domestic markets grew at a whopping 48.8% in the first month of festive season, while exports faltered on weakness in Africa. The growth in the domestic markets was on account of good monsoon and its spread (except some states in east India), absorption of high acquisition costs of vehicles, normalcy prevailing with the pandemic behind us and positive sentiments. On the PV side of the industry, the sector has tailwinds in the form of easing of the chip shortage issue, volume upsurge on new launches, burgeoning order book and a good monsoon. CVs which have all their underlying parameters in place are posting good numbers. Tractors segment has been reporting unstable growth over the past few months. In the month of August, we saw some growth in tractor sales. Also the land preparation phase, wherein a tractor finds highest utility, gets over and farmers start sowing their crops. Also there was deficient rainfall in some of the eastern states of the country (UP, Bihar), which are the key paddy producing markets.

Company wise performance - Among the PV OEMs, MSIL posted yoy growth of 30% in the domestic markets which was driven by a 40% growth in the compact segment, while the UV segment excelled by 10.7% on new launches of the All New Brezza and Grand Vitarra model variants. In the exports markets however, the company posted a 43% yoy growth and a 38% sequential fall. On a mom basis, MSIL sales dipped by 6.1%. TaMo’s PV segment saw a 68% yoy growth on continued success of its EV Nexon, Tigor, Harrier and their new launch of SUV ‘Punch’ last year. M&M’s SUV segment jumped by 87% yoy on the success of Thar, XUV 7oo, XUV 3oo and Bolero Neo. CV division posted growth of 143% yoy as the lower segment zoomed exponentially. M&M’s tractor business in the domestic markets grew by just 0.7% yoy while fell by 7% mom because from farming point of view it’s a silent month. August is generally a lean month, however on a low base of last year and some demand pick up on pent-up demand and new launches led to good yoy numbers on overall basis. The M&HCV segment saw a strong yoy growth for both the companies on low base and since the macro indicators like construction, mining, real estate and farming sectors are very well in place. Also freight availability has been increasing and infrastructure activities are on an up-move given the capex kicker provided by GoI during the union budget.

In 2W segment the performance was positive in the domestic markets. Bajaj reported a growth of 42.3% mom and 48% yoy for its domestic motorcycles while in exports, motorcycles declined by 32.5% yoy and 19.2% mom. TVS 2W segment reported growth of 15% yoy and 5.3% mom as its mopeds segment dropped by 31% yoy and 6.6% mom. TVS’ motorcycle segment grew by 17.4% yoy, while scooters jumped by 40% yoy. For Bajaj, its 3W segment moved up by 23.4% mom and 56.7% yoy domestically. Exports 3Ws however grew by 13.4% yoy and 9.5% mom despite African weakness. Hero Motocorp witnessed just 2% yoy growth. However, this has been a massive recovery from FY 22. New launches, low base and good monsoon is leading this recovery.

Our view - We remain positive on the entire automobile sector. Our choice is in the following order - PVs, CVs and 2Ws. Stocks specifically, within the 2Ws, we like Hero Motocorp as we believe its almost free from the exports weakness. We even like Bajaj Auto on its domestic strength despite exports weakness and then TVS for its volume excellence and margin revival. While on the PV side, we believe MSIL is coming out of the chip shortage issue and with new launches last month, the company is in a sweet spot. Its focus on CNG is yielding good results though it is delaying its EV plans. With new launches coming up, huge order book and their EV plus Hybrid plans now in place, we believe the upcoming quarters to be quite good for MSIL. We also like M&M because of its thrust on rural markets through its leadership in tractors business, prudent capital allocation and a robust growth strategy in UVs, EVs and CVs. We like Ashok Leyland within CVs as it has a diversified revenue base deriving from LCVs, Defense, MHCVs and spares. Tata Motors is seeing a strong PV business, along with a very healthy revival in CVs and improvement in JLR business. Every dip in these stocks in the short term, shall provide good opportunities for investors to enter into them from medium to long term perspective.

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