Stick to market leaders - Q4FY20 Result Preview - Autos & Transportation - HDFC Securities

Due to the COVID impact, we expect volumes in FY21E to decline in double digits across automobile segments. Over FY20-21, this will imply a fall of 30- 40% in volumes. We expect a recovery in volumes from 2HFY21 onwards, as the situation gradually normalizes. In the logistics segment, while volumes for container rail operators will be impacted due to the downturn, the phased commissioning of the Dedicated Freight Corridor will partially offset the impact of the above. We believe that the CV recovery will be further pushed out as fleet utilization levels are expected to remain low over FY21E. Further, the increase in axle loading norms has raised effective system capacity by over 15%. Also, we expect railways to gain market share over FY21-22E, post the DFC which will impact demand for MHCV's. We prefer stocks which are market leaders in their respective segments and have a cash rich balance sheet.

4QFY20 - a challenging quarter: The production of automobiles was impacted sharply by the COVID related disruption and the BS-VI transition as component availability was impacted by the shortage of imported parts (from China and Europe). Similarly, EXIM activity was disrupted due to the lockdown leading to lower volumes for container rail operators.

Surplus cash reserves to cushion the impact: Auto sector balance sheets are robust as large OEMs, including Maruti, Hero, Bajaj amongst others have significant cash on their books, which ranges between 15-35% of market cap. This will enable them to withstand the ongoing downturn. Maruti has cash reserves of Rs 399bn, Hero Rs 63bn and Bajaj Auto Rs 222bn.

Up-trading to be postponed: As consumers postpone purchases in the current environment, we believe that premium OEMs such as Eicher Motors will be impacted. Growth at Royal Enfield was expected from consumers upgrading to the 650cc Twins, which will now be delayed.

Exports to be impacted: For two-wheeler OEMs, we believe that exports will be affected (after witnessing good growth over the past 3 years). A significant portion of shipments are to frontier markets such as Africa (over 45% of Bajaj's exports), which are resource driven economies. As the price of crude oil has corrected significantly and due to the COVID impact, countries such as Nigeria are facing rising deficits.

Market leader to benefit: We believe that market leaders, particularly in the capital-intensive four-wheeler segment will be able to defend/gain market share in the downturn due to their scale and diverse product portfolio. Maruti will further consolidate its leadership position (with market share in excess of 50%) in our view.

Recommendation: We recommend investing in stocks with strong balance sheets and dominant market share. We prefer Hero Moto (BUY), Maruti (ADD) and Container Corporation (BUY) while we would avoid Ashok Leyland (REDUCE) and Eicher Motors (REDUCE).

Source : Equity Bulls

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