Mr. Aditya Makharia, Institutional Analysis Analyst, HDFC Securities
Whereas vehicle demand will profit from the anticipated restoration in financial progress, pent-up demand has been weak within the present unlocking section in comparison with final 12 months because of rising gas costs (+ 40% year-on-year). ) and worth will increase taken by OEMs. Demand for 2W has been lukewarm whereas demand for PV is extra resilient, given the comparatively higher income profiles of automotive prospects. We see restricted margin for EPS upgrades, because of (1) excessive progress expectations and (2) headwinds on margins because of agency commodity costs. Due to this fact, the automotive index ought to transfer consistent with the general market. We reiterate our choice for shares with a various geographic presence – Bajaj Auto, Tata Motors and Bharat Forge. We even have a PURCHASE on Maruti amongst country-centric OEMs because of its product portfolio together with different gas variants (CNG and hybrid fashions to return).
The pent-up demand is weak within the present unlocking section: within the present unlocking section, the pent-up demand is lukewarm (in contrast to final 12 months) as buyer sentiment has been partially affected by (1) the value improve of the gas – gasoline costs are above INR 100 (+ 40% year-on-year) in a number of states, leading to excessive working prices and (2) worth hikes taken by OEMs to offset the rising commodity costs. Moreover, demand within the rural section was not as resilient as a 12 months earlier, with 2W OEMs reporting stagnant gross sales as of June 21. Nonetheless, demand for PV is holding up (as excessive revenue customers have been comparatively much less affected by COVID). The development of the southwest monsoon shall be a key variable in figuring out the extent of the restoration.
Headwinds on margins in Q1 FY22: Commodity costs remained agency with OEMs elevating costs to partially offset the above. Moreover, the sudden explosion of the COVID wave in April-Might 2021 resulted in short-term manufacturing stoppages, which can impression profitability this quarter.
Sector returns converge with the general market: the NIFTY Auto index has moved consistent with the general market throughout fiscal 12 months 1QFY22 (+ 7% QoQ) because of inflation in commodity prices and average progress tendencies over the two weeks. Sector returns have normalized over the previous six months because of inflationary price pressures and excessive valuations. We anticipate restricted scope for EPS upgrades as progress charges sufficiently mirror the anticipated restoration.
Principal suggestions: we’re downgrading Endurance Applied sciences to ADD. Whereas the corporate will proceed to outperform the business because of its rising content material per car, the general restoration within the 2W business has been lukewarm. We imagine that the present valuations of 30x the futures PE sufficiently consider future progress prospects. We desire shares which have a various enterprise combine throughout geographies and reiterate our PURCHASE score on Bajaj Auto, Tata Motors and Bharat Forge. We even have a PURCHASE on Maruti because of its product portfolio together with different fuels (CNG and hybrid fashions to return). We desire Subros amongst home auto equipment.
Logistics / Aviation: As testing has began on the 650 km stretch between Palanpur (Gujarat) and Haryana, we imagine Gateway (BUY) and CONCOR (ADD) will profit from the shift to rail. We now have a REDUCED on Indigo as a result of we imagine its margins shall be impacted by the strengthening of crude costs.