• Vinay Pandit

Auto

The Auto sector has been among the worst-hit over the past 12 months plagued by issues of GST, the upcoming new BSVI engine norms and a weak monsoon last year. However, the government has clarified it’s stand on GST for the sector, which is here to stay at 28%. The positive side is a good monsoon this year which will definitely provide a fillip to rural demand. Add to this the P-D-C season (Puja-Diwali-Chhat), which will be followed by the marriage season, and you can see a clearly rising demand for consumer goods including automobiles.

Lastly, the BSVI deadline is fast approaching. Old BSIV vehicles are already at a discount versus their BSVI peers. Sub-dealers aren’t heavy on inventory this time around. Companies are very closely working with dealers to liquidate the inventory and streamline revenues. Some dealers in the 2 and 4-wheeler segments are carrying inventory levels as low as 35-40 days, which augurs well for festive and rural demand-led primary sales.

Overall, we believe the auto sector has bottomed out and it is time to cherry-pick low valuations in the sector. Bajaj Auto, Hero Motocorp, TVS Motor, and Ashok Leyland continue to be our top picks.

A subsector to Auto i.e. Tyres would continue to see reasonable growth in topline led by good replacement demand. But, gross margins are likely to improve thanks to low rubber and crude oil derivate prices. Apollo Tyres and TVS Srichakra are our top picks in the sector.

Value Fashion Retailing 

This sector too is coming out of a cyclical slowdown in consumption, higher inventory levels and low rural demand led by a weak monsoon last year. Again, a strong monsoon this year and a good kharif season of 2019 will aid rural and Tier 2 and 3 cities demand of consumables. P-D-C plays a big factor for these players too and we believe Q3 should be a decent one for most value fashion retailers. Q2 is historically the weakest in the fiscal.

As per the recent channel checks that we carried out with nearly 35-40 stores in UP, VMart Retail is the format to beat in the micro-markets. This stands true for both the factors namely Same-Store-Sales-Growth (SSSG) and sales per-square feet (PSF). UP and Bihar constitute 60% of VMart stores and staff manning these stores are optimistic about P-D-C targets being achieved. VMart is our top pick in the sector.

Defence 

This sector is not so much about Diwali, as it is about major orders/execution in the second half of the year. This coupled with increasing order books for both the major players namely Bharat Electronics (BEL) and Hindustan Aeronautics (HAL) adds more strength to our conviction in the sector doing well post Diwali. Large system integrators like Bharat Electronics Ltd (BEL) have announced big-ticket order wins, especially from missile programs in the recent quarters. Further, orders for Radars, EWS, Optronics and Avionics worth Rs 20–30 bn each are in the pipeline, as BEL is the ‘preferred agency’ for DRDO labs in some of these programs.

Also, platform companies like Hindustan Aeronautics Ltd (HAL) are seeing improved visibility on awarding of LCA Tejas Mk-1a (FOC received for LCA Tejas Mk-1) and LCH orders, as they are ready for mass production. Defence Procurement Policy (DPP) 2020 is expected to be rolled out in Feb 2020. Areas not covered in strategic partnership policy are being sought to be covered in DPP 2020.

The recent announcements/news flow regarding enhancing FDI in Defence sector through automatic route to 74% will provide necessary fillip to the valuations of the sector. One could expect a lot of action in this sector over the next 3- 5 years as India looks to ramp up its defence procurement, correcting the imbalance of defence standards versus larger peers in the region.

The author is Head of Institutional Equities, IndiaNivesh Securities Ltd. Views expressed are the author’s personal.