Bet on these 5 stocks for double digit return as recovery likely in auto in H2FY21 after last hurdle BS-VI

However, the trouble is likely to end in FY21, when the last hurdle of Bharat Stage VI (BS-VI) transition would be cleared. BS-VI will be implemented from April 2020, after which business will be as usual, experts feel.

"BS6 is the last hurdle in the foreseeable future for the auto industry after going through a difficult operating environment over the last 15 months. This, coupled with initial signs of stability/recovery in demand and under-control inventory, ignites hope of a 'business as usual' scenario from the second half of FY21," Motilal Oswal said.

With the demand environment showing signs of stability and inventory under control, the BS-VI transition is likely to be less problematic (unlike BS-IV), according to the brokerage.

The aforementioned improved scenario, along with the gradual launches of BS-VI models instils confidence that original equipment manufacturers (OEMs) would not have to indulge in a fire sale by March 2020-end to liquidate BS-IV inventory, it added.

The brokerage feels two-wheelers would face the highest cost inflation of 10-15 percent due to the BS-VI transition, estimating total cost inflation for mainstream less than 125cc two-wheelers would be 20-25 percent.

Hence, it expects two-wheelers to be the worst impacted, as BS-VI would not just impact overall demand but also pose the risk of value migration and change in competitive positioning of key OEMs.

In case of passenger vehicles (PVs), the repercussion would likely be mixed, with a limited impact on petrol vehicles (2-3 percent increase) but a high impact on diesel vehicles (8-12 percent increase), Motilal Oswal said, adding the impact on commercial vehicles (CVs) will be determined by economic viability and freight availability, though cost inflation would be high (15-20 percent for LCVs/10-13 percent for M&HCVs).

The brokerage feels BS-VI-related cost inflation has the potential to change competitive positioning and lead to value migration.

It sees the possibility of value migration from (a) executive 100cc motorcycle to the economy, (b) scooter 125cc to e-scooters and (c) diesel PVs to petrol/CNG/hybrid PVs. It also sees the potential for OEMs to gain an
advantage by adopting a differentiated approach for BS-VI compliance.

The brokerage expects some pre-buying in two-wheelers and diesel PVs, but limited pre-buy in CVs due to 30-40 percent excess capacity with fleet operators.

Motilal Oswal believes Maruti Suzuki is best placed to tackle the BS-VI transition due to its less dependence on diesel (around 22 percent of MSIL's domestic volumes) and focus on CNG/strong hybrids.

In 2-wheelers, Eicher Motors is likely to be least impacted as cost inflation for BS-VI would be relatively less at 5-6 percent and with the transition, its core portfolio will get the much-needed overhaul with product quality potentially coming closer to 650cc twins, the brokerage said.

Overall Maruti Suzuki, Eicher Motors and Motherson Sumi are its top large-cap picks, and among midcaps, it prefers Ashok Leyland and Endurance Technologies, which all are expected to return 10-18 percent over a period of one year. The brokerage has a buy call on all stocks.

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