Sector Update

Automobiles
Positive road ahead

Summary
Sector: Automobile
Š December automobile sales are expected to be driven by strong CV sales, while 2W and
View: Positive tractor sales are expected to remain due to high base and slow recovery in rural demand.
Š PV sales expected to improve sequentially, while they remain muted on a y-o-y basis due
to supply constraints.
Coverage universe Š We expect strong uptick in automobile volumes across segments after normalisation of the
economic activity, led by pent-up demand and a favourable macro outlook.
Companies CMP Reco. PT Š Preferred Picks –
(Rs) (Rs)
OEMs: Bajaj Auto, Hero MotoCorp, Tata Motors, M&M, and Escorts.
Alicon Castalloy 823 Buy 1,056
Auto Ancillaries: Bosch, Sundram Fasteners, Suprajit Engineering, Ramkrishna Forgings,
Limited # Gabriel India, Balkrishna Industries, and Apollo Tyres.
Amara Raja 618 Buy 784
Batteries Automotive monthly sales are expected to be mixed across segments in December 2021.
Apollo Tyres 216 Buy 290 Commercial vehicles (CV) are expected to grow strongly, driven by increasing economic
activities and new launches. Dealers are witnessing a strong rise in enquiries and order
Ashok Leyland 123 Buy 180
booking in the passenger vehicle (PV) segment. However, retail sales are expected to
Bajaj Auto 3,177 Buy 4,800 decline, led by chips shortage on a y-o-y basis. Most automobile companies expect
Balkrishna 2,245 Buy 2,700 the semiconductor chip shortage issue to gradually improve from Q3FY2022. Tractor
Industries and two-wheeler (2W) sales are expected to remain muted due to high base and slower
recovery in rural demand.
Bosch 16,802 Buy 21,199
Escorts 1,880 Positive 2,075 Š CV segment to outperform other segments: We expect robust recovery in CV sales on
account of increasing economic activities, improving sentiments of fleet owners, and a
Exide Industries $ 168 Buy 229 lower cost of ownership under BS-VI vehicles. Tata Motors, Ashok Leyland, and Eicher
Gabriel India 141 Buy 173 Motors are expected to dispatch 35,600 units (up 10.4% q-o-q), 10,700 units (up 2.1% on
GNA Axles 661 Buy 948 q-o-q), and 5,000 units (up 22.4% q-o-q), respectively, in December 2021.
Greaves Cotton 140 Buy 178 Š Chip shortage affects sales of PV and premium 2W sales: Most automobile companies
expect the chip shortage issue to improve gradually from Q3FY2022. However, chips
Hero Motocorp 2,417 Buy 4,030
shortage has affected sales of PV and premium 2W bikes. We expect domestic PV
Lumax Auto 160 Buy 207 sales to grow by 17-20% in FY2022E. Among 2W, wholesale dispatches are expected to
Technologies# remain improved. 2W original equipment manufacturers (OEMs) are witnessing strong
M&M @ $ 839 Buy 1,148 demand across segments and areas ahead of the festive season. However, the supply
of premium bikes are getting impacted due to chip shortage. Exports are expected to
Mahindra CIE 231 Positive 345
continue to record strong momentum, with companies such as Bajaj Auto, TVS Motor,
Automotive
and Maruti Suzuki expected to continue to deliver export volumes near peak levels.
Maruti Suzuki 7,297 Buy 8,526
Š Tractor and 2W sales to remain muted: Tractor and 2W sales are expected to remain
Mayur Uniquoters 565 Buy 737 muted due to high base and slower recovery in rural demand. We expect domestic
Ramkrishna 948 Buy 1,480 2W sales to improve from Q4FY2022, driven by recovery in rural demand and festive
Forgings season.
Schaeffler India 8,596 Buy 8,861 Sector view
Sundram 862 Buy 1,100 Retain Positive view on the automobile sector: We continue to remain positive on the
Fasteners # sector despite near-term challenges of COVID-19 related disruptions and chips shortage.
Suprajit 427 Buy 537 The PV segment, both for 2W and four-wheelers, is expected to remain strong amid
Engineering # COVID-19, as a preference for personal transport. Rural demand is expected to drive sales
of tractors, farm equipment, and benefiting companies having a strong rural and semi-urban
Tata Motors # 480 Buy 610 presence. We expect a sequential improvement in M&HCV sales to continue, driven by
TVS Motors $ 610 Buy 803 expected rise in e-commerce, agriculture, infrastructure, and mining activities. We expect
VST Tillers and 2,727 Positive 3,246 the strongest recovery in the CV segment in FY2022E and FY2023E, driven by improved
Tractors Limited economic activities, low interest rate regime, and better financing availability. The bus and
three-wheeler (3W) segments are expected to improve gradually, as corporate offices and
@ MM & MVML; # Consolidated; $ core business valuation;
Source: Company data, Sharekhan estimates educational institutions open. We stay Positive on the sector.
Key risks
The fear of new variants and the third wave of COVID-19 remain a potential concern. Any
significant delay in recovery from COVID-19 infection or vaccination rollout continue to be
a key risk going forward.
Price chart Preferred picks: In the OEM space, we prefer rural-centric companies with a strong balance
170.0
sheet. In the 2W space, we like Hero MotoCorp and Bajaj Auto because of positive
150.0
sentiments in rural and semi-urban areas and strong recovery in export destinations. In
130.0
the tractor segment, we like M&M, given its leadership position in the tractor segment and
110.0
its continued strong performance in other segments such as light commercial vehicles
90.0
(LCV) and utility vehicles (UV). We like Escorts as well in the tractor segment, as it is well
70.0
placed to benefit from a strong rural economy and rise in construction activity. We like Tata
50.0
Motors, led by all round operational performance, led by recovery in CV, PV, and JLR sales.
Dec-21
Dec-20
Dec-19

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May-20

In the auto ancillary space, we like Bosch (due to its extensive network and brand equity),
Sundram Fasteners (beneficiary of strong growth traction in CVs, PV, 2Ws, and tractor
Nifty 50 Nifty Auto
and its strategy to de-risk business from cyclicality), Suprajit Engineering (on account of
Source: NSE India, Sharekhan Research increased share of business with existing clients and new client additions), Ramkrishna
Forgings (beneficiary of the CV upcycle in India, North America, and Europe), Gabriel India
(due to its leadership position and brand recall in the suspension components segment
and focus on the e-mobility space), Balkrishna Industries (market share gains and entry
into new geographies), and Apollo Tyres (strong brand recall in India and Europe and
focus on profitable growth).

December 28, 2021 8

 Sector Update
Valuation
EPS P/E (x)
Company CMP Reco PT (Rs)
FY21 FY22E FY23E FY21 FY22E FY23E
Alicon Castalloy Limited # 823 Buy 1,056 (1.4) 31.2 53.8 NA 26.4 15.3
Amara Raja Batteries 618 Buy 784 36.3 43.8 50.5 17.0 14.1 12.2
Apollo Tyres 216 Buy 290 11.6 18.3 24.0 18.7 11.8 9.0
Ashok Leyland 123 Buy 180 (0.7) 2.9 7.0 NA 41.8 17.6
Bajaj Auto 3,177 Buy 4,800 157.5 189.5 218.5 20.2 16.8 14.5
Balkrishna Industries 2,245 Buy 2,700 59.8 75.4 87.4 37.6 29.8 25.7
Bosch 16,802 Buy 21,199 415.7 482.1 585.7 40.4 34.8 28.7
Escorts 1,880 Positive 2,075 86.4 87.0 96.8 21.2 21.0 18.9
Exide Industries $ 168 Buy 229 8.9 12.7 14.1 15.0 10.5 11.9
Gabriel India 141 Buy 173 3.8 7.0 8.9 37.2 20.1 15.9
GNA Axles 661 Buy 948 32.9 48.1 63.2 20.1 13.7 10.5
Greaves Cotton 140 Buy 178 2.5 5.4 8.1 56.4 26.2 17.3
Hero MotoCorp 2,417 Buy 4,030 145.8 191.0 212.1 16.6 12.7 11.4
Lumax Auto Technologies# 160 Buy 207 6.8 9.7 11.9 23.4 16.5 13.5
M&M @ $ 839 Buy 1,148 32.6 44.3 51.0 18.8 13.9 12.1
Mahindra CIE Automotive 231 Positive 345 2.8 10.3 17.1 64.4 17.6 10.6
Maruti Suzuki 7,297 Buy 8,526 140.0 173.6 265.8 52.1 42.0 27.5
Mayur Uniquoters 565 Buy 737 19.6 24.2 29.4 28.8 23.3 19.2
Ramkrishna Forgings 948 Buy 1,480 8.8 32.0 52.9 107.7 29.6 17.9
Schaeffler India 8,596 Buy 8,861 93.1 161.3 203.2 92.4 53.3 42.3
Sundram Fasteners # 862 Buy 1,100 17.2 22.1 33.3 50.1 39.0 25.9
Suprajit Engineering # 427 Buy 537 9.6 13.4 16.5 44.5 32.0 26.0
Tata Motors # 480 Buy 610 (3.6) 19.5 33.0 NA 24.6 14.5
TVS Motors $ 610 Buy 803 12.9 20.7 25.2 43.5 27.1 22.2
VST Tillers and Tractors Limited 2,727 Positive 3,246 120.7 133.0 162.3 22.2 20.1 16.5
@ MM & MVML; # Consolidated; $ Core business valuation;
Source: Company data, Sharekhan estimates

Sector-wise expectations

Two-wheelers

Š Hero MotoCorp’s volumes are expected to report to ~4 lakh units in December 2021, reporting 14.8% m-o-m
growth and a decline of 10.4% y-o-y, led by slow recovery in rural demand. We remain positive on Hero
MotoCorp and expect it to deliver strong sales in FY2022, aided by recovery in rural markets. Hero MotoCorp
remains focused on exports, premium bikes, and scooters, which are the company’s new revenue drivers.
Š TVS Motors’ sales are expected to report flat growth sequentially at ~2.7 lakh units, marred by domestic sales.
Exports are expected to remain around 98,000 units during December 2021.
Š Bajaj Auto’s monthly sales are expected to be around 3.7 lakh units, down 2% y-o-y. Exports will continue to
help the company to keep monthly run-rate at decent levels.
Š Royal Enfield (RE) is expected to increase by 16.2% m-o-m in December 2021 to 60,000 units. RE’s order book
continues to remain strong, as online orders augur increasingly well for the company.
Š Overall, outlook for the sector remains positive. We expect demand from rural and semi-urban areas to improve
in FY2022. All major 2W OEMs have undertaken price hike of 2-7% this year. Some OEMs have announced
further price hikes from Q3FY2022 to mitigate the impact of raw-material prices.
Š Structurally, we remain positive on the 2W industry owing to strong demand prospects post normalisation
of economic activities, driven by improving personal mobility preference, increasing penetration in the rural
economy, and 2W being the most preferred mode of personal transportation.

December 28, 2021 9

 Sector Update
Three-wheelers

Š Demand recovery in the 3W segment is expected to be at a better pace, as offices and educational institutions
are opening. Opening of local/metro trains will be key demand catalysts.
Š In addition, we expect 3W exports to remain buoyant and help OEMs mitigate the slow recovery in domestic
demand.
Š Bajaj Auto and TVS Motor are witnessing strong recovery in export demand, driven by a robust order book
Passenger vehicles

Š We expect strong recovery in orders in the PV segment in FY2022, driven by pent-up demand and preference
for personal mobility amid COVID-19. However, sales performance has been lacklustre in the previous few
months because of chips shortage issue. Most automobile companies expect the chips issue to gradually
improve in H2FY2022.
Š Maruti Suzuki’s monthly sales are expected at ~1.49 lakh units in December 2021, which is a 7.1% y-o-y decline
and 6.9% m-o-m improvement. Tata Motors are expected to deliver 27.4% y-o-y; M&M’s UV sales are expected
to show 27.7% y-o-y growth in December 2021.
Š Channel checks with dealers suggest strong order book in the PV segment. Retail sales are improving aided
by opening of dealerships. Enquiries have gone up significantly over the past couple of months.
Š Export market continues to remain buoyant and will witness better sales.
Tractors

Š We expect M&M and Escorts tractor sales to report muted growth due to high base.
Š M&M’s tractor sales are expected to decline by 9.9% y-o-y to 20,200 units in December 2021, while Escorts
sales are expected to decline by 11.4% y-o-y to 6,850 units.
Š We stay positive on the tractor segment, although moderation in growth may be expected due to a high base.
Tractor sales are expected to remain healthy, led by strong recovery in the rural economy.
Commercial Vehicles

Š Tata Motors, Ashok Leyland, and Eicher Motors are expected to dispatch 35,600 units (up 10.4% q-o-q), 10,700
units (up 2.1% on q-o-q), and 5,000 units (up 22.4% q-o-q), respectively, in December 2021.
Š We have been witnessing a strong sequential improvement in M&HCV sales since December due to rise in
e-commerce, agriculture, infrastructure, and mining activities.
Š We continue to remain positive on the CV sector and expect a rebound in FY2022E as the situation normalises,
driven by increasing economic activities, improving sentiments of fleet owners, and a lower cost of ownership
under BS-VI vehicles.
Š OEMs’ digital initiatives and real-time monitoring of CV are proving helpful for fleet owners. As per a survey
conducted by an OEM, fleet owners are able to save 10-15% of costs, including 5-10% of fuel costs. Buoyant
demand and CV manufacturers’ focused approach for lowering fleet owners’ total cost of operations (TCO)
through BS-VI transition and digital initiatives are expected to increase replacement demand. We remain
positive on the CV industry and expect M&HCVs to grow by 30-40% in FY2022 after a ~30% decline in FY2021.
Š Demand for LCV is expected to remain strong and will continue to drive the industry’s growth

December 28, 2021 10

 Sector Update
Company-wise expectations for December 2021
^Residual
Maruti Suzuki Dec-21 Dec-20 YoY(%) Nov-21 MoM(%) YTD FY22 YTD FY21 YoY(%) YoY(%) FY22E YoY(%)
3M FY22
Dom PV 1,27,350 1,50,288 -15.3 1,17,791 8.1 9,90,382 9,05,015 9.4 4,59,350 14 15,05,400 10.6

Exp PV 21,500 9,938 116.3 21,393 0.5 1,69,142 60,611 179.1 52,167 81.6 1,78,000 85.1

Total Sales 1,48,850 1,60,226 -7.1 1,39,184 6.9 11,59,524 9,65,626 20.1 5,11,517 18.3 16,83,400 15.5
^Residual
M&M Dec-21 Dec-20 YoY(%) Nov-21 MoM(%) YTD FY22 YTD FY21 YoY(%) YoY(%) FY22E YoY(%)
3M FY22
UV 20,500 16,050 27.7 19,384 5.8 1,51,934 1,03,009 47.5 66,567 43.2 2,20,200 41.6

Cars + Vans 50 132 -62.1 74 -32.4 1,559 1,482 5.2 150 (71) 500 (70)

LCV < 3.5T 15,000 13,389 12.0 14,458 3.7 1,11,328 1,14,536 -2.8 62,167 34.7 2,01,500 32.7

LCV 3.5T> + MHCV 550 541 1.7 521 5.6 4,247 2,070 105.2 2,153 73 7,010 64

3W 2,600 2,865 -9.2 2,564 1.4 19,476 10,866 79.2 12,633 115 40,500 97

Total Dom 38,700 32,977 17.4 37,001 4.6 2,88,544 2,31,963 24.4 1,43,670 43.2 4,69,710 40.7

Exp 3,000 2,210 35.7 3,101 -3.3 23,654 12,142 94.8 6,000 11.3 21,000 14.2

Total Auto 41,700 35,187 18.5 40,102 4.0 3,12,198 2,44,105 27.9 1,49,670 41.6 4,90,710 39.3

Tractor 20,200 22,417 -9.9 27,681 -27.0 2,83,747 2,55,946 10.9 1,19,417 7.9 3,78,450 6.8

Total Sales 61,900 57,604 7.5 67,783 -8.7 5,95,945 5,00,051 19.2 2,69,087 24.4 8,69,160 23.0
^Residual
Tata Motors Dec-21 Dec-20 YoY(%) Nov-21 MoM(%) YTD FY22 YTD FY21 YoY(%) YoY(%) FY22E YoY(%)
3M FY22
CV 35,600 32,869 8.3 32,245 10.4 2,38,551 1,55,183 53.7 1,05,603 40.2 3,52,410 36.2

PV 30,000 23,545 27.4 29,778 0.7 2,42,022 1,38,168 75.2 74,750 13.0 2,54,250 14.5

Total Sales 65,600 56,414 16.3 62,023 5.8 4,80,573 2,93,351 63.8 1,80,353 27.5 6,06,660 26.2
^Residual
Escorts Dec-21 Dec-20 YoY(%) Nov-21 MoM(%) YTD FY22 YTD FY21 YoY(%) YoY(%) FY22E YoY(%)
3M FY22
Total Sales 6,850 7,733 -11.4 7,116 -3.7 74,488 74,153 0.5 37,083 12.4 1,18,100 10.6
^Residual
Ashok Leyland Dec-21 Dec-20 YoY(%) Nov-21 MoM(%) YTD FY22 YTD FY21 YoY(%) YoY(%) FY22E YoY(%)
3M FY22
MHCV 5,800 6,884 -15.7 5,608 3.4 40,050 25,164 59.2 20,900 39.6 68,500 32.2

LCV 4,900 5,878 -16.6 4,872 0.6 37,739 30,991 21.8 17,200 19.9 56,500 15.5

Total Sales 10,700 12,762 -16.2 10,480 2.1 77,789 56,155 38.5 38,100 30.0 1,25,000 24.1
^Residual
Eicher Motors Dec-21 Dec-20 YoY(%) Nov-21 MoM(%) YTD FY22 YTD FY21 YoY(%) YoY(%) FY22E YoY(%)
3M FY22
CV 5,000 4,892 2.2 4,085 22.4 35,830 23,098 55.1 19,983 65.3 64,950 57.8

2W Royal Enfield 60,000 68,995 -13.0 51,654 16.2 4,02,854 4,07,456 -1.1 2,39,393 32.2 7,78,180 27.1
^Residual
Hero Motocorp Dec-21 Dec-20 YoY(%) Nov-21 MoM(%) YTD FY22 YTD FY21 YoY(%) YoY(%) FY22E YoY(%)
3M FY22
Total Sales 4,01,000 4,47,335 -10.4 3,49,393 14.8 37,61,505 42,24,622 -11.0 18,62,108 4.5 59,87,323 3.4
^Residual
Bajaj Auto Dec-21 Dec-20 YoY(%) Nov-21 MoM(%) YTD FY22 YTD FY21 YoY(%) YoY(%) FY22E YoY(%)
3M FY22
Dom 2W 1,36,000 1,28,642 5.7 1,44,953 -6.2 13,10,391 13,21,644 -0.9 5,84,667 4.4 18,90,000 4.5

Exp 2W 1,92,000 2,09,942 -8.5 1,93,520 -0.8 16,76,605 12,36,617 35.6 6,85,274 29.6 22,47,822 25.1

Total CV 37,000 33,948 9.0 40,803 -9.3 3,47,316 2,44,989 41.8 1,38,081 24.4 4,51,243 22.9

Total Sales 3,65,000 3,72,532 -2.0 3,79,276 -3.8 33,34,312 28,03,250 18.9 14,08,022 17.3 45,89,065 15.5
^Residual
TVS Motors Dec-21 Dec-20 YoY(%) Nov-21 MoM(%) YTD FY22 YTD FY21 YoY(%) YoY(%) FY22E YoY(%)
3M FY22
2W 2,60,000 2,58,239 0.7 2,57,863 0.8 23,47,629 20,41,653 15.0 10,03,258 13.1 32,69,774 12.0

3W 14,000 13,845 1.1 14,830 -5.6 1,28,560 82,631 55.6 42,003 16.4 1,40,009 14.7

Total Sales 2,74,000 2,72,084 0.7 2,72,693 0.5 24,76,189 21,24,284 16.6 10,45,261 13.2 34,09,783 12.1
^ Monthly runrate
Source: Company data, Sharekhan estimates

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

December 28, 2021 11

Understanding the Sharekhan 3R Matrix
Right Sector
Positive Strong industry fundamentals (favorable demand-supply scenario, consistent
industry growth), increasing investments, higher entry barrier, and favorable
government policies
Neutral Stagnancy in the industry growth due to macro factors and lower incremental
investments by Government/private companies
Negative Unable to recover from low in the stable economic environment, adverse
government policies affecting the business fundamentals and global challenges
(currency headwinds and unfavorable policies implemented by global industrial
institutions) and any significant increase in commodity prices affecting profitability.
Right Quality
Positive Sector leader, Strong management bandwidth, Strong financial track-record,
Healthy Balance sheet/cash flows, differentiated product/service portfolio and
Good corporate governance.
Neutral Macro slowdown affecting near term growth profile, Untoward events such as
natural calamities resulting in near term uncertainty, Company specific events
such as factory shutdown, lack of positive triggers/events in near term, raw
material price movement turning unfavourable
Negative Weakening growth trend led by led by external/internal factors, reshuffling of
key management personal, questionable corporate governance, high commodity
prices/weak realisation environment resulting in margin pressure and detoriating
balance sheet
Right Valuation
Positive Strong earnings growth expectation and improving return ratios but valuations
are trading at discount to industry leaders/historical average multiples, Expansion
in valuation multiple due to expected outperformance amongst its peers and
Industry up-cycle with conducive business environment.
Neutral Trading at par to historical valuations and having limited scope of expansion in
valuation multiples.
Negative Trading at premium valuations but earnings outlook are weak; Emergence of
roadblocks such as corporate governance issue, adverse government policies
and bleak global macro environment etc warranting for lower than historical
valuation multiple.
Source: Sharekhan Research
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