Autos & Transportation 1QFY22 Results Preview Report - Mixed recovery trends - HDFC Securities

Mr. Aditya Makharia, Institutional Research Analyst, HDFC Securities

While auto demand will benefit from the expected pick-up in economic growth, the pent-up demand has been low in the current unlock phase vis-à-vis last year due to higher fuel prices (+40% YoY) and price hikes taken by OEMs. 2W demand has been tepid while that of PVs is more resilient, given the relatively better income profiles of car customers. We see limited room for EPS upgrades, going ahead, due to (1) elevated growth expectations and (2) margin headwinds on the back of firm commodity prices. Consequently, the auto index is expected to perform in line with the broader market. We reiterate our preference for stocks that have a diversified geographic presence - Bajaj Auto, Tata Motors and Bharat Forge. We also have a BUY on Maruti amongst the domestic-centric OEMs due to its product portfolio comprising alternate fuel variants (CNG and upcoming hybrid models).

Pent-up demand is low in the current unlock phase: In the current unlock phase, the pent-up demand is lukewarm (unlike last year) as customer sentiment has been partially impacted by (1) higher fuel prices - petrol prices are more than INR 100 (+40% YoY) in several states, which has resulted in high running costs and (2) price hikes taken by the OEMs to offset rising commodity prices. Further, demand in the rural segment has not been as resilient as that in the previous year, with 2W OEMs reporting flattish sales in Jun-21. However, demand for PVs is holding up (as the higher income consumers have been relatively less impacted by COVID). The progress of the south-west monsoon will be a key variable to determine the extent of recovery.

Margin headwinds in 1QFY22: Commodity prices have remained firm, with OEMs raising prices to partially offset the above. Further, the sudden outburst of the COVID wave in Apr-May 2021 had resulted in temporary production shutdowns, which will impact profitability this quarter.

Sector returns are converging with the broader market: The NIFTY Auto index has performed in line with the broader market in 1QFY22 (+7% QoQ) due to commodity cost inflation and moderating growth trends across 2Ws. The sector returns have been normalising over the past six months due to inflationary cost pressures/elevated valuations. We foresee limited scope for EPS upgrades as growth rates are adequately factoring in the expected recovery.

Key recommendations: We are downgrading Endurance Technologies to an ADD. While the company will continue to outperform the industry due to its increasing content per vehicle, the overall recovery in the 2W industry has been tepid. We believe the current valuations of 30x forward PE are adequately factoring in future growth prospects. We prefer stocks that have a diverse business mix across geographies and reiterate our BUY rating on Bajaj Auto, Tata Motors, and Bharat Forge. We also have a BUY on Maruti due to its product portfolio comprising alternate fuels (CNG and upcoming hybrid models). We prefer Subros amongst the domestic auto ancillaries.

Logistic/aviation: As the trial runs have started on the 650km stretch between Palanpur (Gujarat) and Haryana, we believe that Gateway (BUY) and CONCOR (ADD) will benefit from the shift towards the rail. We have a REDUCE on Indigo as we believe its margins will be impacted by firming crude prices.

Source : Equity Bulls

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