Special Report - Auto OEMs: FY20 Annual Report Discussion

FY20 was eventful for the Indian auto industry largely dominated by de-growth in volumes tracking muted consumer sentiment, switchover to BS-VI regime, thrust on electrification, impressive product launches in resilient UV segment including new foreign OEMs. Total industry volumes de-grew 14.8% YoY to 2.63 crore units (domestic down 18% to 2.16 crore units, exports up 3% to 47.66 lakh units), making it the worst yearly performance in the past decade. The decline was broad based, with 2-W, PV, 3-W down 14.4% 2.09 crore units), 14.8% (to 34.52 lakh units), 10.2% (to 11.39 lakh units), respectively. CVs fared worst, down 29.7% YoY to 7.78 lakh units.

Our view

The upcoming festive period and expected continual pickup in economic activity would guide future offtake but on a full year basis we expect discretionary spend related segments i.e. 2-W, PVs to post ~15% YoY fall while CV space drop-off set to be sharper at 25%+. Tractor industry, however, is seen growing in single digits for the year. We expect healthy double-digit revival in volumes across segments in FY22E on the back of low base and expected improvement in general economic activity levels.

Mahindra & Mahindra (M&M) remains our top pick in OEM space for its market leadership in domestic tractor industry (benefiting from demand tailwinds) and recalibration of capital allocation strategy. Apart from M&M, we also retain BUY on Tata Motors (TML), Escorts. We upgrade Ashok Leyland (ALL) to BUY in the domestic CV space on the cusp of cyclical recovery over next three-six months and greater probability of affirmative scrappage policy in near future. Post the recent correction in stock price, we also upgrade Eicher Motors (EML) to BUY primarily tracking successful inroads made by the Royal Enfield franchise in the middle-weight category in key export markets and large part of supply side issues behind it. We continue to assign HOLD rating to leading 2-W makers Hero MotoCorp (HMCL) and Bajaj Auto (BAL) while unchanged valuation concerns compel us to retain our REDUCE rating on PV leader Maruti Suzuki (MSIL).

FY20 will go down as an important milestone for the domestic auto industry. We gleaned some interesting takeaways from the perspectives put forth by industry leaders i.e. OEMs in their annual reports. In the following report we state some key discussion points and highlights from our reading of the annual reports of our auto OEM coverage universe.

For details, click on the link below: https://www.icicidirect.com/mailimages/IDirect_AutoOEMsARUpdate_Sep20.pdf

Source : Equity Bulls

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