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ICICIdirect Research Posted on 05:15pm 04-May-2020

Sector Update - Auto: Bullishness sharpens on rural-focused domestic OEMs...

Bullishness sharpens on rural-focused domestic OEMs

In our auto sector update on March 27, we had presented our views in light of the imposition of nationwide lockdown and its effects on production, sales and consequent financials of our coverage universe companies. With the blanket nationwide lockdown ending on May 3, the focus shifts to ‘red zones’ for even more stringent implementation of lockdown measures for virus containment whereas ‘green zones’ and ‘orange zones’ across the country are expected to gradually limp back to normalcy over time. Most red zones are centred around urban areas, raising the possibility of rural India staging a relatively quicker revival. Similarly, southern region, as a whole, remains less exposed to the virus. Thus, it could recover before the rest of India. Accordingly, we revisit our thoughts for two companies in particular – Hero MotoCorp (HMCL) and Mahindra & Mahindra (M&M), as likely beneficiaries of these developments.

Our interaction with a few coverage companies revealed some details of business operations at present. Key highlights of the same:

A. M&M: The company has reopened ~40-45% of its tractor dealerships (pan India) primarily towards the end of April 2020 while manufacturing operations still remain suspended. M&M tractor dealers have about four to five weeks of inventory, which will help meet any imminent pent up demand. The company believes the automobile segment demand recovery is still some time away and tractor segment will precede wider automobile sales volume recovery domestically in FY21E

B. Escorts: It has reopened ~30-40% of its dealerships primarily towards the end of April 2020, although manufacturing operations (ex-spares) still remain shut. Escorts had witnessed encouraging enquiry levels pre Covid-19 lockdown and is confident of healthy demand recovery, going forward

C. Bajaj Auto: It has started reopening dealers, primarily in green zones as of now, although exact numbers are difficult to ascertain at this moment. The company is in discussions with dealers to support them in these troubled times (on a case-to-case basis) through extension of credit period, low interest loans, etc. However, it is not currently extending greater per unit margins to them. Bajaj Auto has restarted operations in its key plants like Waluj (Maharashtra) primarily to meet pending export orders. The company also believes the rural 2-W demand recovery will precede urban 2-W demand recovery.

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