Unlock helping two wheelers, auto-stocks could be heading to normalcy

Source :Sify
Author :Finance Desk
Last Updated: Tue, Oct 13th, 2020, 17:57:31hrs
Bajaj Auto

Mumbai: Automotive stocks trading on the exchanges could be heading for a normalcy, given the positive consumer demand in the month of September.

On Monday, HDFC Securities announced a report stating that demands similar to pre-covid levels were spotted in two-wheelers, passenger cars and tractor segments.

According to the report 'Autos & Transportations Q2FY21 Results Preview' prepared by the Institutional Research Desk at HDFC Securities, sales recovery is led by further opening of various regions (Unlock 5.0), sustained rural demand and inventory build-up ahead of the festive season.

"We expect an all-round improvement in margins in 2QFY21 driven by rising utilisation levels (production is now running at 65-90 per cent of capacity)," said Aditya Makharia, Institutional Research Analyst (auto), in the report.

"Correspondingly, valuation multiples for auto companies continue to re-rate and are now trading at levels between mean 'P/E and +1std deviation'," Makharia added.

As per the report, Nifty Auto index is up a further 20 per cent over the quarter versus 9 per cent for the broader Nifty.

"We believe that stock price returns will be driven by retail trends in the festive season as well as expectations of supportive government policy (GST reduction, scrappage scheme).

"We have a BUY on Maruti, Hero and Endurance in the autos segment and prefer Gateway Distriparks in the logistics segment," Makharia said.

A similar positive tone was maintained by Emkay Securities in its recent report.

The report announced last week observed:

Auto stocks comprises of stocks such as Amara Raja Batteries, Apollo Tyres, Ashok Leyland, Atul Auto, Bajaj Auto, Bharat Forge, Eicher Motors, Escorts, Exide Industries, Hero Motocorp, Mahindra and Mahindra, Maruti Suzuki Ltd, Motherson Sumi Systems, Mahindra and Mahindra, Tata Motors, Tata Motors DVR, TVS Motors.

Emkay's Alpha Portfolio comprises of heavyweight auto stocks such as Bajaj Auto, Eicher Motors, Hero Motocorp, Mahindra & Mahindra, Maruti Suzuki India, and Tata Motors.

A note from Emkay said, "On the other hand, rural prosperity has been driving the demand for tractors. Tractor industry demand has been strong at 12% growth in H1FY21, owing to positive rural sentiments. Farm income levels have improved due to better yield and prices. In addition, increased government outlay for agriculture/rural segments has supported the sentiment. Demand is better for first-time buyers and higher HP categories. South and West regions are outpacing North and East regions. Demand has been stronger than supply. OEMs are working toward ramping up production, and most companies are working at over 80% utilization."

It also added, "Tractor demand remains robust, thanks to positive customer sentiment. Expect revenue/EBITDA growth for ESC at 15%/51% and MM at 3%/9%."

Expectations of festive season demand is high. Given that festive season is commencing post a lengthy inauspicious period, demand pick-up is expected across segments. For tractors growth is expected to be in double digits while for PVs and 2Ws it is expected to be flat or in single digits. The months of Aug-Sept'20 have brought plenty of signs that the volumes may be well along on its recovery from sharp cyclical downturn. We estimate that the recent recovery volumes will manifest into a powerful cyclical rally across segments.