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Sequential growth seen across the board, except tractors

Sector performance - May witnessed a strong performance for almost all the auto majors sequentially in the domestic markets except tractors. On a yoy basis, May was unusually high on a very low base as the base month had witnessed a very severe Wave #2 of the Covid-19 pandemic. Therefore, it does not make sense to compare any numbers on yoy basis. MSIL reported goof numbers as the chip shortage issue is gradually resolving. TaMo grew well on its CV business along with AL. The ongoing marriage season in rural parts of North India yielded some positivity in 2W sales. On the PV front, though the supply side concerns are reducing, most of the OEMs have still not achieved the pre-pandemic levels of production and industry experts believe that it will take at least 2-3 quarters more for the complete recovery. High end 2Ws along with PVs are also facing the brunt of semi-conductor chip shortage issue. CVs which have all their underlying parameters in place are posting good numbers. Especially in May LCV segment surpassed MHCV performance by a good extent. Tractors segment after a weak FY 22 has seen a strong surge in numbers in May on a yoy basis. However, we saw a slight sequential decline in tractor sales as there was a ban on exports of various food grains like wheat, sugar etc in the latter half of the month.

Company wise performance - Among the PV OEMs, MSIL posted mom growth of 1.4% in the domestic markets which was driven by a 14.8% growth in the entry level segment of Alto and Wagon-R, while the UV segment pulled it back by declining at 17.4%. In the exports markets the company posted a 47.7% mom growth as we are witnessing developing markets evolving for the entry level car segment and also for Maruti’s export product Jimny. TaMo’s PV segment saw a 4.2% mom growth on continued success of its EV Nexon, Harrier and their new launch of SUV ‘Punch’ last year. M&M’s SUV segment jumped by 20% mom on the success of Thar, XUV 7oo, pick ups and Bolero Neo. CV division posted growth of 21.5% mom as smaller LCVs zoomed by 23%. M&M’s tractor business in the domestic markets grew by a whopping 50% yoy while fell by 13.3% mom. The sequential fall was on the back of ban on exports of various food grains like wheat in May. Due to same reason, even Escorts witnessed a similar trend. The M&HCV segment saw a small sequential growth for both the companies as April saw a high base. However, 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 3% mom for its domestic motorcycles while in exports, motorcycles they declined by 18.6 yoy. TVS 2W segment reported growth of 2.5% as its scooters and mopeds segments dropped by 1.5% and 2.5% mom respectively. TVS’ motorcycle segment grew by 6.9% yoy. For Bajaj, its 3W segment moved up by 81% mom domestically. Exports 3Ws dipped by 50% mom on SL and Egypt concerns. Marriage season in certain pockets of the country, festivals in some states and sentimental positivity led to this growth. Hero Motocorp is yet to report its numbers.

Our view - We remain positive on the entire automobile sector. Our choice is in the following order - CVs, PVs and 2Ws. Stocks specifically, within the 2Ws, we like Bajaj Auto as we believe the upcoming months to report good growth in domestic as well as exports on the back of recovery in the domestic markets, new launches and exports revival, especially in Africa and Latin America. We even like Hero on its domestic strength and then TVS for its volume excellence and margin revival. While on the PV side, we believe MSIL is facing the supply side brunt more than others and is losing out on market share. However 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. 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 CVs and improvement in JLR business. Every dip in these stocks in the short term (driven by higher input costs, supply chain issues etc), shall provide good opportunities for investors to enter into them from medium to long term perspective.

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