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November sales disappoint despite festive

Sector performance - The base month of November 2020 marked a rapid revival in almost all sectors barring CVs. Last year by this time, in line with fast rural recovery, 2Ws and tractors had majorly recovered leading to a high base in November. Also the festive season last year was better than this year for autos. Last year PV recovery was led by the pent up demand in both rural and urban markets, while this year managements of OEMs mentioned that the pent up demand has ended by September this year. In FY 22, post the much more intense Wave #2 of the pandemic in April and May, the rural markets are still badly impacted and are taking more time to recover than expected. Also, there has been a delay in harvesting of Khariff crops due to late monsoon, thus impacting rural Cashflows and retail demand in the rural markets. This impacted the 2Ws entry segment and tractors. On the PV front, most of the OEMs are facing scarcity of semiconductor chips, which is the case even in sports and premium segments of 2Ws. Therefore, they cannot cater to the robust demand testified by the encouraging response for the new launches and their long waiting periods. The only bright spot we observed this month again was the M&HCVs which have all their underlying parameters in place. Even in FY 21, they saw a late recovery, which is helping the CV numbers look even stronger yoy. LCVs are in weaker lane on high base of last year.

Company wise performance - We observed a deceleration in all the segments of MSIL yoy as semiconductor issue remained in all its PV segments; albeit less severe than before. MSIL faced the issue more than others due to its higher scale of operations and market leadership position. Their management declared that the production in December shall be 80-90% of pre-Covid levels as chip issue seems to be resolving. TAMO’s PV segment however saw a 38% yoy growth on continued success of its EV Nexon and new launch of SUV ‘Punch’ in October. M&M’s SUV segment grew by 7.9 % yoy on success of XUV 7oo while reported 3.2% de-growth mom. M&M and TAMO are handling the chip issues better than MSIL hence their sales are seeing a good growth. CV division however posted de-growth as LCVs disappointed consecutively for the third month. We believe that was due to high base of last year as LCVs were the consistent strong performers ever since the first wave due to robust demand for e-commerce products, FMCG and pharmaceutical goods. M&M’s tractor business in the domestic markets de-grew 17% yoy and 42.5% mom as the Khariff harvest got delayed. Due to same reason, even Escorts witnessed a similar trend both yoy and mom. The M&HCV segment saw a 10% growth yoy for both TAMO and AL. This is due to rapid growth in the macro indicators like construction, mining, real estate and farming sectors. Also freight availability has been increasing and infrastructure activities are on an up-move. Sequentially they de-grew by 7% for AL and 18% for TAMO. In 2W segment, Bajaj reported a fall of 23% yoy for its domestic motorcycles while in exports it declined by 1.7% yoy. TVS 2W segment reported de-growth of 17.2% yoy as its scooters and mopeds segments dipped by 29.4% and 40.5% respectively. For Bajaj, its 3W segment expanded by 28.5% yoy domestically. This was the most heartening sign for a strong recovery. Exports 3Ws grew by 2% yoy.

Our View - Despite a weak November, we expect a decent FY 22 on a very low base of H1 FY21. Given a healthy double digit growth in YTD FY22, we believe the impact of Wave #2 is mitigated for CVs. 2Ws and tractors may post a mid single digit growth in FY 22, while PVs and CVs are expected to grow close to 10% and 20-25% respectively. Therefore FY 22 is expected to be better than FY 21 provided there is no Wave #3. Stocks specifically, we prefer Bajaj Auto (#1 in 2W exports markets) in the 2Ws as its growth is well driven by exports and 3Ws, while on the PV side, we believe MSIL is pricey as far as its valuations are concerned given its supply side conundrum and delay in EV plans. We 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 coming from LCVs, defense, MHCVs and spares. Also the recovery and growth in its monthly numbers is thick and fast. Tata Motors is seeing a strong PV business, along with a very healthy revival in MHCVs and improvement in JLR business. Every dip in these stocks in the short term (driven by pandemic, supply chain issues etc), shall provide good opportunities for investors to accumulate them from a medium to long term perspective.

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