Tractor manufacturers, global suppliers to outperform in Q2

In the domestic market, passenger vehicle makers are in a better position as compared to two wheeler companies

While auto sales are gradually picking up with the unlock process across states, the Street believes that a full recovery in volumes last seen in March 2021 will start with the festival season at the end of August. Within the consumer segments, the recovery for car makers will be faster than two wheelers. Jinesh Gandhi & Vipul Agrawal of Motilal Oswal Financial Services believe that  2W volumes may remain weak, while PV demand is expected to recover faster on the back of personal mobility preference, supported by low inventory of 10-20 days. 

In addition to the need for personal mobility, analysts highlight that pent up demand as was the case last year coupled with recovery in discretionary spends to aid the growth of passenger vehicles. Says an analyst at a foreign brokerage, “While two wheelers too recovered last year, the rural segment sales are much weaker this time around especially in the entry level segment. Further, price hikes in this segment have been 20 per cent as compared to mid-single digit for passenger vehicles.” 

Thus price hikes by Maruti and Hero MotoCorp are expected to impact the latter much more. Despite Maruti’s dominance in multiple segments of the car market, its operating profit margin has slipped from 15 per cent to about 9 per cent now which is lower than the profitability of two wheeler makers. While Hero’s margins will be squeezed given volume and competitive pressures (weak market position in scooters, premium motorcycles), Maruti will be less impacted from the recent hikes, say analysts.  

Among other segments, while demand for the truck segments is expected to recover only by the end of the September quarter, tractor demand continues to be robust. Though tractor volumes were impacted in May due to lockdowns amid the second wave, analysts at Emkay Research believe that customer sentiments have been supported by enhanced crop procurement by the government, expectations of good monsoon and moderate minimum support price hikes for Kharif crops. This should benefit Mahindra & Mahindra and Escorts in the listed space.

The other segment the street is betting on in Q2 are auto makers which have a global presence such as Tata Motors and suppliers such Motherson Sumi, Endurance Technologies, Bharat Forge, Varroc Engineering, Apollo Tyres among others. While car production is expected to hit peak levels in the next couple of quarters in the US, the demand for the luxury segment too has been strong in Europe and the US. The sharp rise in used car prices are expected to boost new car sales especially the leasing market which accounts for 30-40 per cent of sales. 

In the near term, global players look more promising, while domestic players would see recovery in the second half of FY22, says Mitul Shah, Head of Research at Reliance Securities. He expects the tractor segment and global Indian majors to outperform in the September quarter with growth being led by Escorts, Bajaj Auto, Tata Motors, Bharat Forge and RK Forging from our coverage universe.