Autos & Transportation - Q1FY21 Results Preview - Stocks factoring in an early recovery - HDFC Securities

Mr. Aditya Makharia, Institutional Research Analyst, HDFC Securities.

Volume growth over 1QFY21 was uneven as production was initially impacted by the plant shutdown in Apr 2020, while retail demand picked up sharply in June. Correspondingly, valuation multiple for auto companies re-rated from trough levels to above mean P/E levels. NIFTY Auto index is up 51% from the Mar 2020 levels (vs. 28% for the broader NIFTY). The rally has been driven by several factors, including (1) recovery in volumes for rural segment/increased preference for personal mobility, (2) improved focus on capital allocation, and (3) benign sector valuations. We believe that stock price returns will be more gradual from here on as expectations of a recovery in volumes is partially priced in. Against this backdrop, we recommend Maruti and Endurance as our preferred sector picks.

Volumes revived in Jun 2020: (1) There was a significant MoM uptick in volumes across two-wheelers, entry-level cars, and tractors. Hero's sales at 450k (3x higher MoM, -27% YoY), Maruti sales at 52k (up 2.8x MoM, -53% YoY) and Hyundai (+70% MoM) have likely grown ahead of the market. Escorts volumes at 10,851 units (+21% YoY) benefitted from the agri-led demand. (2) With most of the dealerships open for operations, we believe that the sales were supported by pent-up demand, improving rural demand and shift to personal mobility. (3) With improving rural sentiments on the back of structural government reforms and timely arrival of monsoons, tractor sales have normalised to pre-pandemic levels.

Stock multiples have re-rated: Valuation multiples for auto companies have now risen to above mean levels as the NIFTY Auto index is up 51% from the Mar 2020 levels (vs. 28% for the broader NIFTY). The rally has been driven by several factors, including (1) recovery in volumes for rural segment/increased preference for personal mobility, (2) improved focus on capital allocation, and (3) benign sector valuations. We believe that stock price returns will be more gradual from here on as expectations of a recovery in volumes are partially priced in.

1QFY21 earnings outlook: Earnings will be muted for the quarter due to plant shutdowns in April and May. Weak commodity prices are likely to partially cushion margins, as operating deleverage will impact profitability. Earnings of the tractor segment (Escorts) are likely to outperform the sector.

Logistics: Volumes for container rail operators are expected to be muted. However, the stock price of CONCOR will be driven by news flow around privatisation, while that of Gateway Distriparks will be determined by deleveraging initiatives.

Key recommendations: Maruti and Endurance are our preferred picks in the auto/auto parts sector. The former will benefit from its entry-level portfolio (rural is ~40% of sales) and higher exposure to gasoline vehicles. Endurance is expected to gain share in the 2W/3W component segment, led by order wins/new product introductions. We remain cautious on the commercial vehicle sector due to a delayed recovery and recommend REDUCE for Ashok Leyland.

Source : Equity Bulls

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