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May’21: Lockdown hurts volumes across segments…

…expectation of pent-up demand in Jun’21

PVs, CVs, and Tractors May’21 sales were above our expectations, while 2Ws were in line with our estimate. Wholesales were impacted by localized lockdowns across states and supply-side issues. Demand is expected to recover as restrictions are lifted. While dealers are hopeful of a sharp recovery in demand for PVs, CVs, and Tractors, customer behavior after the lifting of lockdown restrictions is a key monitorable. 2W/PV/M&HCV/LCV/Tractor volumes declined by 34%/35%/47%/40%/-1.5% CAGR (v/s May’19).

* A majority of OEMs – MSIL (1-16st May’21), TTMT’s Jamshedpur plant block closure (18-22nd May’21), HMCL (22nd Apr’21-16th May’21), MM (four days of closure in May’21), RE (27-29th May’21), and ESC (1-3 rd May’21) – have advanced their maintenance shutdowns during Apr-May’21 to merge it with the ongoing lockdown. BJAUTO and TVSL also faced shutdowns, but the exact dates are not known.

* 2Ws – In line with our estimate, 34% CAGR decline (v/s May’19): Volumes declined by 34% CAGR (v/s May’19), down 39.5% MoM. BJAUT and TVSL performed better than the industry on the back of exports. Volumes for HMCL/ RE/BJAUT/TVSL posted a 47%/34%/19%/28% CAGR decline over May’19 (down 51%/49%/31%/32% MoM).

* PVs – Above our estimate, 35% CAGR decline (v/s May’19): PV wholesales were affected in May’21 due to the combination of localized lockdown, supply-chain constrains, and unavailability of industrial oxygen. MSIL’s volumes were in line (-41% CAGR v/s May’19), down 71% MoM. MM volumes (UVs including Pickups) posted a decline of ~34% CAGR (v/s May’19, -50% MoM). TTMT’s PV volumes posted a growth of 18% CAGR growth (v/s May’19, -40% MoM).

* CVs – Above our estimate, 43% CAGR decline (v/s May’19): Both M&HCV and LCV volumes were above our estimates. M&HCV/LCV volumes posted a 47%/40% CAGR decline (v/s May’19), down 49%/34% MoM. AL posted a 51% CAGR decline (v/s May’19, -62% MoM). TTMT’s CV volumes reported a 39% CAGR decline (v/s May’19, -32% MoM). VECV posted a 50% CAGR decline (v/s May’19, -43% MoM).

* Tractors – Above our estimate, 1.5% CAGR decline (v/s May’19): Tractor volumes declined by 1.5% CAGR (v/s May’19, -11% MoM). The second COVID wave has led to localized lockdown in rural markets, affecting sales. Commercial demand of Tractors has slowed down a bit. MM/ESC’s Tractor volumes posted a -1%/3% CAGR decline.

Valuation and view:

The Auto industry was impacted by COVID infections peaking in May’21, leading to localized lockdowns and affecting consumer buying sentiment. 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 offers 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 the Auto Component stocks, we prefer ENDU. We prefer TTMT as a play on global PVs.

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