• Aditya Battu

How is the auto sector shaping up post lockdown?

The auto sector has already been witnessing a slowdown for the past few years, with 2019 being one of the worst years (~17% decline as compared to 2018) due to:

  • Overall slowdown in the economy

  • Liquidity crunch due to the NBFC crisis: NBFCs were not able to raise funds / lend at favourable rates and hence the customers didn’t have money to purchase vehicles

  • Increase in road tax and third-party insurance

  • BS-VI transition from BS-IV

  • Expectation of a possible GST reduction from the current 28%

Just when things seemed to be picking up, Covid has emerged and the auto sector plunged once again, which has put a further pressure on the already falling stock prices

Commerical vehicles (MCV/HCV) seem to be the most affected, followed by passenger vehicles and 2-wheelers


Let’s look at how the various segments of the auto sector are emerging post lockdown and how the demand for the coming months for these various segments look like:


1A. Passengers vehicles:


Sluggish demand for 4 wheeler passenger vehicles continues. June has seen from recovery from May lows but this could be pent up demand. Auto companies are positive about festive season but we can be sure of this only if the demand holds up in August

Factors to look for which could impact stock movement in the coming months:

  • Demand pick up in the festive season

  • Implementation of scrappage policy: Govt will setup scrappage units for old and polluting cars/commercial vehicles and will pay you for selling your old vehicles accordingly. This could boost demand for new vehicles and reduce prices

  • Reduction in GST rates


1B. Commercial Vehicles:


LCV: Demand for LCV from rural and urban areas has picked up faster as compared to MCV/HCV due to rising agricultural incomes with good monsoon season and hike in minimum support prices


MCV/HCV: The demand is still low due to low fleet utilization, postponing purchases & sluggish economy due to Covid


Tractors: Have witnessed a huge spike in demand with increasing farm activity, rising incomes due to good harvest and discounts being provided during purchase due to reduction of raw material prices (iron & steel)

Stock prices (YTD returns : Jan'2020 vs Jul'2020)

On the stock front, Mahindra continues to outperform Sensex and other auto stocks due to higher sales driven by tractors where Mahindra is the market leader (40% market share), followed by Eicher Motors & Maruti Suzuki


Eicher seems to perform better than its other commerical vehicles peers such as Ashok Leyland & Tata Motors due to higher sales driven by Royal Enfield motorcycles


Maruti seems to be doing just average


Ashok Leyland & Tata Motors still continue to lag behind due to continuing low demand for Commercial Vehicles ( CV )


Factors to look for which could impact stock movement in the coming months:

  • Implementation of scrappage policy

  • Another liquidity boost to NBFCs and measures to improve agri and allied sectors infra

  • Govt’s push towards additional infra projects which could help commercial activity pick up



1C. 2-wheelers:


2 wheelers have witnessed faster recovery as compared to 4 wheelers due to rising demand from rural and semi urban areas which accounts for 50% of the motorcycle demand and also 2 wheelers being the most affordable vehicles for personal mobility during these Covid times


Stock prices (YTD returns : Jan'2020 vs Jul'2020)


Hero Motorcorp continues to outperform as it is the market leader(~35%) in the 2 wheeler segment, followed by Bajaj, Eicher & TVS which seem to perform average


Factors to look for which could impact stock movement in the coming months:

  • Surge in demand during festive season

  • Improving rural sentiment and preference for personal vehicles might continue to drive demand for 2W in the coming months



2. Tyres:


Recent results from Tyre manufacturers have just met expectations. OEM demand still remains muted but replacement market is witnessing a spike post lockdown due to resuming of commercial activity and mobility. Raw materials (Rubber & crude) prices have also reduced, so margins might improve in the coming few months

MRF & CEAT seem to do just average. Apollo Tyres, with comparable sales, lags behind its peers, which could be a potential opportunity in the short term


Factors to look for which could impact stock movement in the coming months:

  • Passenger vehicles demand picking up in the festive season

  • Continuing strong demand for 2 wheelers and 3 wheelers

  • LCV & tractor segments continuing to grow

  • Margins improvement due to reduction in raw material prices



3. Auto components:


Recovery still muted with lower domestic OEM demand which contributes to 2/3rd of the total revenue. Exports, which contribute to about 1/3rd of the revenue are also likely to be in the red. Also, the aftermarket sentiment is low with lower vehicle usage and limited automotive service workshops in operation due to Covid



Motherson Sumi : One of the leading auto, truck and motorcycle parts supplier

Exide : Leading battery manufacturer

Bharat Forge : Leading forging company

Cummins : Market leader in diesel engine manufacturing


All the above stocks continue to underperform as compared to broader market index

( Sensex )


Factors to look for which could impact stock movement in the coming months:

  • Firms with higher exposure to commercial vehicles and who have taken large debt for expansion are likely to suffer more as compared to the others

  • US (25%), UK (7%) & Germany (4%) are the largest export markets for auto components and with rising corona cases, especially in the US, the demand could remain sluggish

  • 12% of the exports are to the oil dependent countries (such as Africa & Latin America). With decreasing oil prices their economies might contract affecting the demand for auto and auto components

  • Forging companies particularly, such as Bharat Forge & AIA Engineering are likely to be affected more as 60% of their revenues are derived from exports.

  • Tyres & diesel engine manufacturers derive 20% of revenues from exports. Tyres are slightly shielded due to rising replacement market, but diesel engine manufacturers might witness slowdown due to structural shift towards petrol engines globally

  • Batteries & wiring (10% are exports) are likely to be least affected

4. Future Outlook : The auto sector continues to under perform except for those which have increased presence in the rural and semi urban areas, where the demand is expected to remain strong. What remains to be seen is if the festive season would help revive the demand for this sector, along with some of the other factors discussed above




Links for References : 1, 2, 3

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