FY21 may be a washout for auto, ancillaries; 9 buy ideas with 2-yr horizon

The financial year 2020-21 is likely to be a washout for auto and ancillaries sectors with the coronavirus outbreak causing unprecedented disruptions.

Brokerage firm Reliance Securities expects the industry volume to fall by 20 percent in FY21E, which would rebound strongly with 35 percent and 8 percent growth in FY22E and FY23E, respectively.

"On account of the COVID-led disruption, we expect complete washout in Q1FY21E and quarter-on-quarter (QoQ) improvement in Q2FY21E, while moderate volume recovery is expected in the second half of FY21E," said the brokerage.

"Accordingly, we expect a sharp decline in volumes to the tune of 73 percent year-on-year (YoY) and 47 percent YoY in Q1FY21 and Q2FY21E, respectively," said Reliance Securities.

Reliance Securities expects a strong rebound in industry volume in FY22E, which would surpass FY20 volumes, while FY23E volume would surpass the previous peak of FY19.

As per the brokerage, this will translate into automobile industry volume growth of 35 percent and 8 percent in FY22E and FY23E, respectively.

Due to a likely rural revival, the brokerage expects tractor and two-wheeler segments to outperform, while the commercial vehicles will witness a recovery towards the end.

Stocks to buy
The brokerage is positive on India’s long-term growth story and in view of low penetration, coupled with rising per capita income, the automobile industry will continue to record 8-10 percent CAGR over the long term.

"We believe near-term uncertainty and poor visibility of future business would result in valuation contraction until the issue gets resolved. Further, the recent sharp correction in the stock prices provides an opportunity to own quality business at an attractive valuation," the brokerage said.

The brokerage has 'buy' recommendations on Maruti Suzuki, Tata Motors, Mahindra & Mahindra, Ashok Leyland, Hero MotoCorp, TVS Motors, Escorts, RK Forging and J K Tyres.

Bajaj Auto, CEAT and Apollo Tyre are sell calls for Reliance Securities.

The brokerage said FY21 would not be appropriate for business analysis and it would be meaningful to focus on the next two-three years.

"In-line with a change in our time horizon to two years (from one year earlier), we accordingly change the two-year target price for all companies under the auto sector universe based on FY23E earnings," said the brokerage.

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