Sector Update | 28 May 2020
Automobiles
Industry limping back from lockdown’s impact…
“This has been the trend
before covid-19 and the
expectation that it will
continue is reasonable and
logical. The rabi crop has been
very good and farm incomes
will be higher as a result. The
effect of covid-19 seems to be
more in urban clusters than
rural areas. So, that part is
also positive. The negative is
that some urban activity-led
income, which used to go
back to rural areas through
migrant labourers, will be a
little impacted. Rural sales will
bounce back quicker.”
Mr Shashank Srivastava,
executive director, marketing
and sales, Maruti Suzuki
…as both demand and supply side restart in constrained manner
After almost zero sales in Apr’20 due to the complete lockdown, the Indian Auto
industry has restarted operations (both plants and dealerships) partially, even as it
adheres to new operating norms. For Apr’20, most OEM plants were operating at <30%
average utilization while <50% dealer outlets were operational (except tractors, which
had 60-70% operational dealerships).
Our interaction with leading industry channel partners indicates 2W/PVs are seeing
resurgence in inquiries (~50% of normal at operational dealerships). On the other
hand, CVs are seeing negligible demand (from construction sector only). Overall
consumer sentiment is low and even in rural markets, customers are cautious with
spending given the uncertain environment.
Wholesales are expected to decline substantial in May’20 for all OEMs due to (a) the
lockdown, (b) absence of non-discretionary demand, and (c) supply constraints. While
demand for 2Ws and PVs is seeing some recovery from semi-urban and rural markets,
CVs have minimal demand due to low economic activity and cautious financiers as
many operators have already opted for moratorium. Also, to lend to CVs/3Ws,
financiers currently are stringent and highly risk averse.
In May’20, wholesale volumes are estimated to decline ~77%/~77%/~90% YoY for
2Ws/PVs/CVs due to the lockdown and low demand. Tractors volumes are expected to
decline by ~71% YoY.
2Ws: Demand is returning driven by (a) preference for personal vehicles rather than
the public transport, and (b) higher disposable income in rural market due to good
harvest. While this could be an initial spurt in demand, sustenance of the same is a key
monitorable. We expect wholesales to decline 73% YoY for BJAUT (75% fall in domestic
2Ws), 76% YoY for TVSL, 80% for HMCL and 75% for RE, majorly due to the lockdown.
PVs: Post the gradual lifting of lockdowns sales have recovered slightly, largely due to
conversion of pre-lockdown bookings. MSIL is in a comparatively better position than
peers due to its entry-level portfolio. Volumes are expected to decline ~74% for MSIL.
Wholesales should decline ~85% YoY for M&M UVs (incl. pick-ups) and ~86% for TTMT
PVs due to the lockdown.
CVs: The CV segment is the hardest hit due to low economic activities. Our channel
checks suggest that MHCVs have seen marginal demand only from the construction
segment and are not expected to recover before the festive season. This is due to (a)
BS4 pre-buying in 4QFY20, (b) price hike of 16-18% on BS6 (12-13% cost inflation + 3-
5% due to discount withdrawal), (c) depressed fleet utilization, and (d) stringent
financing norms. We expect CV wholesales to decline ~91% for TTMT (-95% for
M&HCVs) and ~92% YoY for AL (-95% for M&HCVs).
Tractors: The Tractor segment was better off than others due to good Rabi harvest,
robust reservoir levels and forecast of normal rains supporting demand along with
comparatively relaxed lockdown norms, which has supported supply. We expect
tractor volumes to decline ~70% YoY for M&M and ~75% for Escorts due to supply-side
constraints.
Jinesh Gandhi – Research Analyst
(Jinesh@MotilalOswal.com); +91 22 6129 1524
Vipul Agrawal – Research Analyst
(Vipul.Agrawal@MotilalOswal.com) +91 22 7193 4322
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P
1
Capital.
27 March 2020
Investors are advised to refer through important disclosures made at the last page of the Research Report.
 Motilal Oswal Financial Services
Automobiles
Valuation and view:
The near-term demand outlook is weak as we see gradual
restoration of normalcy post lifting of the lockdown. We hope for gradual recovery
from 2HFY21, which should be led by the festive season. With multiple moving parts in
the form of (a) normalization of supply side, (b) consumer sentiment, (c) availability of
finance, and (d) impact of BS6 cost inflation, demand normalization in 2HFY21 is the
biggest monitorable. Valuations appear attractive across companies, but given the
uncertain macro environment and threat of the possible prolonged impact of
Coronavirus, we prefer stocks offering higher visibility of demand recovery, better
competitive positioning, scope of higher operating leverage and strong balance sheet.
EIM and MSIL are our top large-caps picks. Among mid-caps, we prefer ENDU.
Snapshot of volumes for May-20
Company Sales
Maruti Suzuki
Total Domestic
Export
Mahindra & Mahindra
UV (incl. pick-ups)
Tractors
Tata Motors
HCV's
LCV's
CV's
Cars
UV's
Hero MotoCorp
Bajaj Auto
Ashok Leyland
CV (ex LCV)
LCV
TVS Motor
Eicher Motors
Royal Enfield
VECV
Escorts
May-20
34,975
32,703
2,272
13,996
5,894
7,411
4,383
594
2,271
2,865
839
680
130,406
106,756
1,081
447
634
74,951
15,593
626
2,048
YoY
May-19
134,641
125,552
9,089
70,125
39,294
24,704
41,792
11,878
18,925
30,803
4,194
6,795
652,028
419,235
13,172
8,946
4,226
307,106
62,371
4,801
8,325
YoY (%)
chg
-74.0
-74.0
-75.0
-80.0
-85.0
-70.0
-89.5
-95.0
-88.0
-90.7
-80.0
-90.0
-80.0
-74.5
-91.8
-95.0
-85.0
-75.6
-75.0
-87.0
-75.4
MoM
MoM (%)
Apr-20
chg
632
5434.1
0
-
632
259.5
5,505
154.2
733
704.1
4,772
55.3
0
-
0
-
0
-
0
-
0
-
0
-
0
-
37,878
181.8
0
-
0
-
0
-
9,640
677.5
91
85
705
17034.9
636.1
190.5
FY21 YTD
35,607
32,703
2,904
19,501
6,627
12,183
4,383
594
2,271
2,865
839
680
130,406
144,634
1,081
447
634
84,591
15,684
711
2,753
FY20 YTD
277,886
259,620
18,266
142,398
77,662
53,256
85,701
24,649
37,317
61,966
10,322
13,413
1,226,394
842,550
26,798
18,292
8,506
626,093
125,250
8,762
12,091
(%) chg
-87.2
-87.4
-84.1
-86.3
-91.5
-77.1
-94.9
-97.6
-93.9
-95.4
-91.9
-94.9
-89.4
-82.8
-96.0
-97.6
-93
-86.5
-87.5
-91.9
-77.2
FY21
estimate
1,346,218
1,261,968
84,250
667,828
322,064
286,819
413,083
108,242
171,318
279,560
72,964
60,559
5,642,940
3,804,792
125,565
71,386
54,179
2,940,797
667,044
43,841
88,599
Gr. (%)
-13.8
-16.7
-6.1
-17.2
-20.0
-5.0
-12.7
-13.0
-20.8
-17.9
1.0
0.2
-12.0
-17.6
0.2
-9.2
16.1
-9.9
-4.2
-10.0
3.0
28 May 2020
2
 Motilal Oswal Financial Services
Automobiles
NOTES
28 May 2020
3
 Motilal Oswal Financial Services
Automobiles
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UNDER REVIEW
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Expected return (over 12-month)
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< - 10%
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Rating may undergo a change
We have forward looking estimates for the stock but we refrain from assigning recommendation
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28 May 2020
4