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Sequential growth seen in January

Sector performance – The calendar year started on a subdued note as auto numbers saw a decline yoy on almost all the counters except the CV makers in January. TAMO grew on its PV business as well, while AL witnessed a growth purely on its CV business. Sequentially we witnessed a strong growth across the board on seasonally weak December. Emergence of third wave of pandemic in January also had some impact on demand. Omicron, though not very severe still affected demand somewhat in January. Last year by this time, in line with fast rural recovery, 2Ws and tractors had majorly recovered leading to a high base in January 21, which was also the first month when Covid cases had significantly reduced. 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 itself. 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. On the PV front, though the supply side concerns are reduced, most of the OEMs have still not achieved the pre-pandemic levels of production. 2Ws are still finding it difficult to cope up with demand on the back of steep hike in their acquisition costs. M&HCVs which have all their underlying parameters in place are posting good numbers. Even on month on month basis the CVs have posted a strong performance except the SCV sub segment.

Company wise performance- Among the PV OEMs, MSIL posted de-growth of 4% yoy which was driven by a steep fall of 25.9% in the entry level segment of Alto and Wagon-R. Sequentially the total growth was 0.8%while the entry level segment grew by 14%. The compact segment dipped by 7% yoy and grew by 3.1% mom. In the exports markets the company posted a robust growth of 44% yoy as we are witnessing developing markets evolving. TAMO’s PV segment saw a 51% yoy growth on continued success of its EV Nexon and new launch of SUV ‘Punch’ in October. M&M’s SUV segment fall of 3.2% yoy while reported 13.6% growth mom. CV division posted growth of a whopping 57.7% yoy as LCVs excelled after a long period of dip in sales. M&M’s tractor business in the domestic markets de-grew 36.9% yoy while grew 26.8% mom as the Khariff harvest has got delayed. Due to same reason, even Escorts witnessed a similar trend both yoy and mom. However, we expect a recovery in these numbers in coming months on strong Rabi season and expectations of a bumper harvest in the ensuing months. The M&HCV segment saw a 17.5% growth yoy for AL and 4% for TAMO. Sequentially they grew by 7% for TAMO and 13.7% for 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. In 2W segment, the weak performance continued. Bajaj reported a fall of 14% yoy for its domestic motorcycles while in exports it declined by 17.4% yoy. TVS 2W segment reported de-growth of 13.7% yoy as its scooters and mopeds segments dipped by 18% and 39% respectively. For Bajaj, its 3W segment moved up by 6% yoy domestically. Exports 3Ws dipped by 4% yoy on Egypt concerns. Hero Motocorp as well reported a disappointing performance in January with sales declining by 21.7% yoy and 3.6% mom as entire 2W pack is under pressure.

Our view – Despite a soft January, we expect a decent fiscal FY 22 on a very low base of H1 FY21 except for tractors which saw a phenomenal year FY 21 with a growth of 27%. Given a healthy double digit growth in YTD FY22, we believe the impact of Wave #3 is mitigated. 2Ws and tractors may post a lower to 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 as the impact of Omicron is not huge. 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 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 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 enter into them from medium to long term perspective.

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