Hero MotoCorp, Ashok Leyland, Tata Motors, Escorts, Maruti Suzuki share costs II Heading South or North?
Auto Sector Q3 Fiscal 21 was expected to be a strong quarter for both auto and auto accessory companies. Both sales and operating performance improved. Some companies reported the highest quarterly sales and profits ever. The third quarter of fiscal 21 was a strong comeback after a clean wash in the first quarter of fiscal 21. A shift towards digitization, controlling administrative costs, focusing on core business, expanding business through product innovations were the key factors that led to superior results .
In the Sharekhan universe of auto companies, net income rose 50.5% year over year for the third quarter of fiscal 21, revenue increased 12.6% and EBITDA margins increased 297 basis points. An improvement in operating profit margins has been common for most companies, although major commodity prices such as steel, aluminum, copper, rubber, lead prices, rhodium and others used in the automotive sector have soared. Operating performance improved primarily due to a better product mix, lower fixed costs, efficient working capital management and prudent capital allocation.
Sharekhan expects the growth momentum to continue due to pent-up demand, a preference for personal mobility, and a faster than expected recovery in infrastructure, mining, and other economic activities. Operational performance is expected to remain strong in the fourth quarter of fiscal 2021, led by the benefits of operational leverage, cost-cutting measures, and better export scenarios. Government efforts to promote the Make in India and AtmaNirbhar programs, the Production-Linked Incentive (PLI) program, scrapping policies and a focus on rural and urban development should keep the automotive sector going.
Preferred selection: Held MotoCorp, Bajaj Auto, TVS Motor, Maruti Suzuki, M & M, Bosch, Schaeffler India
Executives for the third quarter of fiscal 21: Ashok Leyland, Tata Motors, M&M, Maruti Suzuki, TVS Motor
Latecomers for the third quarter of fiscal 21: Exide Industries, Greaves Cotton
During the third quarter of FY 21, the mood in the countryside was strong due to the good monsoons, the increasing sowing of kharif and the increase in farmers’ incomes. Demand was mainly led by semi-urban, rural, tier 2 and tier 3 cities. In addition, companies with a strong presence in rural India saw strong demand. Companies like M&M, Escorts, Hero Honda and Maruti Suzuki did well. Exports also grew well where vehicle sales normalized. OEMs like Bajaj Auto, TVS Motor, and Maruti Suzuki were the main beneficiaries.
Auto component companies also saw robust export demand and some companies outperformed domestic markets. In the second half of the third quarter of fiscal year 21, commercial vehicles recorded strong growth momentum, as activities in the infrastructure sector increased sharply. CV industry leaders Tata Motors and Ashok Leyland are expected to see strong earnings growth driven by volume growth, leverage, cost-cutting measures, and low base.
Main risks for the automotive sector:
Rising raw material prices and a shortage of microprocessor semiconductors are also a potential risk in the future. In addition, exports continue to make a major contribution to domestic industry and are therefore exposed to the global macro environment and currency fluctuations.