As Covid restrictions eased in various states in June, the automobile sales for the month improved. Experts now feel the growth in the second quarter of FY22 will be better given the pick up in vaccinations, preference for personal transport due to Covid and expected normal monsoon.
Many brokerages predict volumes will rise further going ahead backed by some pent-up demand as well.
"June 2021 volumes were above estimates due to a pick up in retails in last 1-2 weeks of the month. We expect volumes to further improve in Q2FY22 due to the easing of lockdowns and pent-up demand," said Emkay Global.
Sharekhan also expects pent-up demand to drive growth for the automobile sector in Q2FY22.
"Moreover, original equipment manufacturers (OEMs) dependent on exports will be better positioned to drive volumes during the current scenario. We remain positive on the automobile sector and expect a strong rebound in FY22," said the brokerage.
According to ICICI Securities, faster vaccination could help improve consumer sentiment across urban and rural markets, though the increased vehicle prices (up around 3-8 percent across segments since January 2021) and higher fuel costs may dampen the demand in the entry-level segments.
June Sales Performance
Most auto companies reported better-than-expected sales in June 2021 backed up easing of lockdown restrictions. Domestic sales across various segments - passenger vehicles, commercial vehicles, two-wheelers and tractors - were healthy.
But three-wheeler and bus passenger segments were hit due to the closure of schools & colleges and corporate offices as many employees worked from home.
Automobile numbers are not comparable on a YoY or MoM basis due to Covid-related lockdown restrictions affecting supply chain.
"Automobile companies witnessed faster recovery in June 2021 sales compared to Street expectations, led by strong recovery in rural and semi-urban sentiments. OEMs commentary on June dispatches was mostly positive. Over the last fortnight, auto companies have received overwhelming enquiries from retail customers," said Sharekhan.
The brokerage further said companies penetrating into rural markets witnessed strongest recovery. Hero MotoCorp, M&M, Escorts, Maruti Suzuki, Hyundai India, and Tata Motors saw strong recovery in dispatches.
Demand from export markets continued to remain robust for most OEMs, though there was a concern of container unavailability.
"Bajaj Auto and TVS Motor benefitted from their stronghold in export markets. Maruti Suzuki's exports were at record levels in June 2021," said Sharekhan.
Hero MotoCorp sales grew by 156 percent in June compared to May 2021, TVS Motor reported 51 percent growth MoM, Bajaj Auto 27 percent, and Royal Enfield 60 percent growth.
Maruti Suzuki dispatches increased 217 percent in the same period, Mahindra & Mahindra's passenger vehicle volumes grew 111 percent and utility vehicle 115 percent, and Tata Motors registered 70 percent growth.
Also read: Mahindra & Mahindra reports total tractor sales of 48,222 units in June
Sharekhan said the recovery in the passenger vehicle (PV) segment was the highest followed by tractors, two-wheelers and commercial vehicles as compared to pre-Covid sales during the second wave.
In these challenging times, OEMs have reduced dealer stocks to support dealers and channel partners and have aligned production with adequate inventories for catering to customer demand, the brokerage added.
Stocks that brokerages bet on post June sales
Analysts remain positive on the sector given the low rate environment and expected normal monsoon. They name six stocks to bet on.
Sharekhan's preferred picks are Hero MotoCorp, Maruti Suzuki and Mahindra & Mahindra, while Emkay's top picks are Tata Motors, Ashok Leyland and Eicher Motors.
In the auto ancillary space, Sharekhan's preferred picks are Bosch, Sundram Fasteners, Suprajit Engineering, Ramkrishna Forgings, Gabriel India, Greaves Cotton and Apollo Tyres.
Motherson Sumi Systems, Apollo Tyres, and Bharat Forge are Emkay's top picks.
"The passenger vehicle segment, both for two-wheelers and four-wheelers, is expected to remain strong amid COVID-19, as a preference for personal transport. Rural demand is expected to recover strongly in southern and western India, given timely arrival of the monsoon season, higher reservoir levels, and higher kharif sowing last year," said Sharekhan.
The brokerage feels tractor sales are likely to pick up, ahead of the summer crop. "We expect sequential improvement in M&CV sales to continue, driven by expected rise in e-commerce, agriculture, infrastructure, and mining activities," said the brokerage.
LKP Securities said Hero Motocorp (2-wheeler market leader and king in the rural markets), Bajaj Auto(#1 in 2-wheeler exports markets) and Maruti Suzuki (PV market leader) would be the winners, as the brokerage believes that they being market leaders with widespread distribution network, will be the best placed to increase their market shares and gain from the current situation.
The brokerage also believes that M&M with its thrust on rural markets through its leadership in tractors business and prudent capital allocation and a robust growth strategy is one of the best investment stories.
LKP likes Ashok Leyland within commercial vehicles (CVs) as it has a diversified revenue base deriving from LCVs, defense, MHCVs and spares. "Tata Motors is seeing a strong PV business, along with a revival in MHCVs. Every dip in these stocks in the short term (driven by pandemic, supply shortage etc), shall provide good opportunities for investors to enter into them from medium to long term perspective," said the brokerage.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.