Bumpy ride ahead for auto: Expect a double-digit drop in FY21 sales; Maruti, Eicher better placed

While most sectors of the economy may see a revival after the lockdown ends and the COVID-19 crisis comes under control, the automobile sector is unlikely to have a respite anytime soon.

Brokerages point out that the near-term demand and supply outlook for the sector is hazy and long-term recovery will depend on the extent of job losses, salary cuts and government stimulus.

A clear picture will emerge only after the end of the lockdown.

For a sector, which had been trying to overcome myriad challenges already, the outbreak of COVID-19 is no less than a curse.

In FY20, automobile volumes declined on account of weak economic scenario, price increase due to BS-VI transition, inventory correction by OEM’s and COVID-19 impact in March 2020.

An uncertain and rough road is ahead for the sector.

As per a report by brokerage firm Edelweiss Securities, a double-digit dip in FY21 sales is expected.

On an optimistic note, if demand recovers from Q3FY21 then the two-wheeler (2W) segment may see a sales decline of 13-14 percent, passenger vehicles (PVs) sales may fall by 10-12 percent and trucks sales may fall by 20 percent in FY21, said Edelweiss.

However, it looks like demand should recover from Q4FY21 and in that case, 2W, PVs and trucks may clock a decline of 18-22 percent, 12-14 percent and 24-28 percent, respectively, the brokerage said.

But what if recovery gets postponed to Q1FY22? In that case, as per Edelweiss, sales of 2W, PVs and trucks may decline 20-25 percent, 18-25 percent and 50 percent, respectively.

"Q1FY21 is a complete washout (April – no production, May can be at nearly 25 percent and June at about 40 percent). In the near-term, pent-up demand and shift to private vehicles can drive sales (once activity normalises). Demand could be in favour of pre-owned rather than new vehicles," Edelweiss said.

Besides, resumption of demand will hinge on how the entire supply chain functions while the much-talked rural demand will depend on whether the farmers realise money for the market or not.

"We do not expect a meaningful resumption in production until the entire supply chain (suppliers to dealers) starts functioning. However, even a strong recovery if assumed in FY22, volumes will be well below FY19 peak. Rural demand hinges on farmers’ ability to realise money for their harvest. Demand for pre-owned vehicles may get a boost," said Edelweiss.

The brokerage believes incrementally, earnings and cash flows will be more sensitive to changes in pricing rather than volume.

OEMs, tractor segment better placed

Edelweiss believes structurally original equipment manufacturers (OEMs) are more sound compared to the past due to resilient margins and better free cash flow (FCF) profiles.

Brokerage firm Prabhudas Lilladher also believes that on a relative basis, OEMs with controlled inventory (OEMs with nearly 7-10 days of inventory), having a large rural presence (rural recovery to come faster followed by semi-urban and urban) and focus on small to mid-range products (with a decline in purchasing power, customers will tend to move towards the lower end segment) are likely to recover faster.

The brokerage prefers Maruti Suzuki and Eicher Motors among OEMs as it highlighted that structural levers are intact for Maruti while for Eicher, Royal Enfield's focus on increasing penetration in key motorcycling states and gaining monopoly along with natural upgrade option in 300+cc category for global expansion is a key positive.

Prabhudas Lilladher is of the view that tractor demand looks positive due to higher yield on seasonal crops (10-15 percent higher than the normal), positive agri sentiments backed by high reservoir level, higher discounting continued (up to Rs 45,000) and lower financing rate.

"Haulage, non-agri tractor and commercial application will also be less impacted as these will be benefitted with an increase in various other applications," said Prabhudas Lilladher.

"Don’t see a major impact on tractor sales due to lockdown as about 80-90 percent harvesting has already been done and there is good demand from key states like Rajasthan, Punjab and MP. Inventory levels have remained stable at nearly 20-25 days and are sufficient to cater the demand once the shutdown is over," said Prabhudas Lilladher.