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Good growth in PVs, 2Ws witness domestic recovery, CVs rock solid, tractors decline seasonally

Sector performance - July witnessed a good performance for the auto OEMs. On a yoy basis, the declines witnessed in FY 22 for the two wheeler sector is getting wiped off, especially in the domestic markets with all the three companies witnessing low single digit declines(Hero Motocorp) to a double digit growth (TVS). Bajaj in domestic markets grew at 9.4%, 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, robust marriage season in the North 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 July, we saw a sequential as well as yoy declines in tractor sales as July is a lean month. 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, which are the key paddy producing markets

Company wise performance - Among the PV OEMs, MSIL posted mom growth of 12.9% in the domestic markets which was driven by a 40.8% growth in the entry level segment of Alto and Wagon-R, while the UV segment excelled by 23.4% on new launches of the All New Brezza and Grand Vitarra model variants. In the exports markets however, the company posted a 14.8% mom fall on high base. On a yoy basis, MSIL sales grew by 8.3%. TaMo’s PV segment saw a 5.1% 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 34% mom on the success of Thar, XUV 7oo, XUV 3oo and Bolero Neo. CV division posted growth of 23.8% mom as the bigger segment zoomed exponentially. M&M’s tractor business in the domestic markets de-grew by a whopping 45% mom while fell by 14.4% yoy. July is a generally a lean month and the base was also high which led to this seasonal fall. Due to same reason, even Escorts witnessed a similar trend. 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 31.2% mom and 5.2% yoy for its domestic motorcycles while in exports, motorcycles declined by 13.6% yoy and 21% mom. TVS 2W segment reported growth of 12.8% yoy and 2% mom as its mopeds segment dropped by 22% yoy and 7.8% mom. TVS’ motorcycle segment grew by 8.3% yoy, while scooters jumped by 49% yoy. For Bajaj, its 3W segment moved up by 40% mom and 68% yoy domestically. Exports 3Ws dipped by 23.5% yoy on African weakness. Hero Motocorp witnessed just 2% dip yoy. 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 Bajaj Auto as we believe the upcoming months to report good growth in domestic markets as well as in exports markets lime LatAm and Asia. 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 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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