Retail sales of passenger vehicles (PVs) were up nearly 10% year-on-year in September, driving the auto sector to a reasonably good performance. Registrations rose 11.45% month-on-month but were down 10.24% y-o-y. The performance was dragged down by the commercial vehicle (CV) segment, which reported a drop in sales of nearly 34% y-o-y. A pre-festive channel check by Emkay Global highlighted that the retail volume improvement in August-September has been driven by pent-up demand, positive rural sentiment, shift towards personal mobility and the fading impact of price hikes. Demand has been better in small cities and rural areas in comparison with metros and tier-1 cities.
Inventory days have increased to 30-40 days for PVs and 35-45 days for two-wheelers (2Ws). Led by robust rural demand and personal mobility, the share of entry-level segments is increasing both in PVs and 2Ws. Companies benefiting from this trend include Maruti Suzuki (PVs) and Hero MotoCorp (2Ws). Premium segment volumes are also improving, supported by lesser impact on income levels and adequate finance availability for customers in these segments, it said.
According to Kotak Institutional Equities, Maruti Suzuki’s Ebitda is expected to increase by 36% y-o-y in Q2FY21, led by a 15% y-o-y rise in revenues mainly driven by volume growth and 170 bps y-o-y improvement in Ebitda margin due to operating leverage benefits. In the two-wheeler segment, Ebitda of Hero MotoCorp is expected to increase by 25% y-o-y due to strong volume recovery (up 7% y-o-y) resulting in higher profitability due to operating leverage benefits and cost-cutting initiatives taken up by the company. However, Bajaj Auto’s Ebitda is likely to decline by 5% y-o-y in Q2FY21 as strong growth in the domestic motorcycle segment will be offset by a steep decline in the 3W segment and a negative impact of withdrawal of export incentive scheme.
It expects Eicher Motors’ Ebitda to fall by 22% led by a 10% y-o-y decline in volumes and adverse RM prices, while M&M plus MVML’s Ebitda is expected to increase by 2% y-o-y in Q2FY21 led by 60 bps y-o-y improvement in Ebitda margin mainly due to richer product mix (higher tractor segment mix in Q2FY21). Escorts will also report a strong quarter (Ebitda up 42% y-o-y) due to a 24% y-o-y increase in tractor volumes and richer product mix. Overall, JLR may report a 28% y-o-y decline in Ebitda due to a 17% y-o-y drop in volumes.
In the CV segment, Ebitda of Ashok Leyland is likely to decline by 60% y-o-y in Q2FY21 due to a 33% y-o-y dip in volumes leading to negative operating leverage as demand trends continue to remain weak, it said. Tractor sales continued their dream run as kharif sowing witnessed record progress against last year. With a good rabi season resulting in good disposable income, rural market also saw its rub-off effect on 2Ws, small PVs and CVs. Overall, 2Ws, 3Ws and CVs continued to march ahead on a m-o-m basis and inched up to narrow their gap with last year’s sale, even though the pre-Covid levels are yet to be seen across all categories, according to Fada.
With banks and NBFCs gearing up with various festival offers to woo retail customers, auto sales are expected to witness a renewed growth and may close on a par with last year. PVs and 2Ws are expected to lead the way. However, as a caveat, Fada cautioned that with the festival season round the corner and elections approaching in Bihar, the risk of Covid spread resurging may play a spoilsport in specific regions. Any dampener in vehicle sales during the upcoming festivals will have a catastrophic impact on dealers’ financial health. “Fada thus once again advises extreme caution to both OEMs and the dealers to avoid building any further inventory as this may lead to a disastrous situation,” it said.
According to Motilal Oswal Institutional Equities research note, while it was a seasonally weak month, OEMs utilised it to refill their inventory on the expectation of a strong festive season in September. While the upcoming festive season is expected to be highly fruitful, the sustenance of demand after that is the key parameter to monitor. Valuations are reflecting recovery from H2FY21, leaving limited margin for safety for any negative surprises, it added.
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