Auto sector Q2 preview: Volumes expected to rise led by tractors, PVs; 3-wheelers to show delayed recovery

As the Indian economy starts limping back to normalcy, the auto industry may report better growth in volumes led by better rural sentiment, low interest rates, improving finance availability and a gradual pick up in business and economic activity.

Tractors, passenger vehicles and 2-wheelers may continue to show upward trajectory supported by improving retail and inventory build-up with dealers before the festive period. However, 3-wheeler passenger segment will show a delayed recovery due to preference for personal mobility over shared.

The auto industry witnessed year-high growth of 32 percent during the month of September led by a strong order book for the upcoming festive period.

2-wheelers makers like Hero MotoCorp, Honda Motorcycle, Scooter India and Bajaj Auto recorded double-digit growth during September.

Research firm Emkay Global Financial Services expects the upward trajectory to continue in tractors, passenger vehicles and 2-wheelers, supported by improving retail and inventory build-up with dealers before the festive period.

Driven by positive rural sentiment, growth in tractors is expected at 15-18 percent to 97,000-100,000 units driven by positive rural sentiment, it said. Domestic passenger vehicle industry volumes are expected to grow over 20 percent, helped by growth across OEMs. It expects domestic volumes to grow 135 percent for TTMT, 25 percent for MSIL and 14 percent for MM, Emkay added.

The research firm expects volumes to improve in the coming quarters on better rural sentiment, low interest rates, improving finance availability and a gradual pick-up in business and economic activity. "Our top picks are Ashok Leyland with target at Rs 89 per share) followed by Eicher Motors with targer of Rs 2,754, Hero MotoCorp with target of Rs 3,701 and Mahindra & Mahindra with target at Rs 718 per share, Emkay added.

According to LKP Securities, passenger vehicles sales, backed by the personal mobility theme and low base, posted strong sales performance as market leader Maruti Suzuki posted a very strong 31 percent YoY growth.

For the tractor sales, surplus monsoons, support from the government, shorter lockdown period for tractor dealerships, consideration of tractors as essential services and slightly lesser impact of COVID-19 on the rural markets led to this performance. After tractors witnessed a second consecutive month of sequential drop in August, September sales zoomed up on both MoM and YoY basis as expected.

3-wheelers are facing the heat due to being one of the victims of social distancing theme surfaced during the pandemic. M&M’s auto business is more of diesel and high end SUVs, where demand is seeing a fall due to its high ticket size considering job losses and salary cuts of the clientele.

LKP Securities expects a better H2 FY21 and a stronger FY 22. Hero MotoCorp, Bajaj Auto and Maruti Suzuki will be the winners, as we believe that they being market leaders with widespread distribution network, will be best placed to increase their market shares and gain from the current situation. it said.

"We also believe that Mahindra & Mahindra with its thrust on rural markets through its leadership in tractors business is one of the best investment stories. On the CVs business, we believe this sector (particularly the M&HCVs) to be the last to revive as it is plagued by several issues such as weak macros, driver unavailability, tepid industry output, lack of clarity on scrappage norms and price hikes due to BS VI."

3-wheeler passenger segment will show a delayed recovery due to preference for personal mobility over shared, while cargo segment will show a faster revival, LKP Securities said.