The COVID-induced lockdown is likely to continue its devastating impact on the auto and auto ancillaries sector, with aggregate revenue expected to decline by -2% CAGR in Q1 FY22, Emkay Global Financial Services’ quarterly review noted. Revenue has been compared with Q1 FY20 due to the extremely low base of Q1 FY21.
All down, but tractors
From a volumes perspective, passenger vehicle industry volume dropped 5% CAGR in Q1 FY22, while the two-wheeler industry experienced a massive drop in volumes to decline by 29% CAGR. Volumes in the commercial vehicle sector went down by 24% CAGR.
In the OE space, the agency expects tractor makers including Escorts and Mahindra to improve their performance, while among ancillaries such as Motherson Sumi, Apollo Tyres and Bharat Forge – aided by their overseas presence – are expected to do better.
Passenger vehicle volumes are expected to continue to grow in the coming months. The growth seen last month on easing of lockdowns and a healthy order-book are likely to push PV volumes north. Two-wheeler volumes, meanwhile, are likely to recover sequentially in Q2, supported by pent-up demand and the marriage season. Better macro-economic factors, increased spending on infrastructure and replacement demand is expected to spur gradual growth in CVs.
Interestingly, tractor volumes grew 11% in Q1 FY22, but projections for the future aren’t too promising. Emkay expects volumes to decline in H2 due to high base and lower government subsidy support, leading to estimated lower volumes in FY22.
Major revenue impact
In addition to falling volumes, revenue of two-wheeler players is expected to decline across the board. Bajaj Auto is expected to fall 4%, TVS 5%, Royal Enfield 10% and Hero MotoCorp by 15% CAGR. The agency expects revenue performance of Bajaj and TVS to be relatively better due to their higher exposure to the export markets.
Similarly, in the PV space, market leaders Maruti Suzuki India is expected to post revenue decline of 4% CAGR in Q1 FY22. The story is even worse for some of the CV players. Revenue is expected to fall at a CAGR of 24% for VECV and 30% for Ashok Leyland.
In the tractor segment, revenue for Escorts is likely to grow 7% CAGR, while Mahindra’s Agri division is likely to grow 11% in the last quarter.
Battery makers Exide and Amara Raja may witness revenue declines at 9% and 4% CAGR respectively. In comparison, Emkay expects companies with notable overseas exposure to do better, with CAGRs of 5% for Motherson Sumi and 1% for Apollo Tyres, while Bharat Forge should see a marginal decline of 2% CAGR.
Conclusion
Emkay’s positive view on the automobile sector is underpinned by expectations of a strong cyclical upturn, which is expected to last at least three years. However, Key downside risks, including delay in economic recovery, third wave of COVID -19, further increase in commodity prices and adverse currency movement, can’t be ruled out.