Automobiles Subdued sales in May Sector Update

Automobile monthly sales are expected to remain subdued in May 2021 as well, Sector: Automobiles marred by extension of lockdowns from most states to break the chain of COVID-19 View: Positive infections, depending upon the severity of the COVID wave in the respective states. Monthly auto sales are not comparable either on a y-o-y basis or m-o-m basis. The vaccination drive has improved in May 2021 and states such Maharashtra, Delhi, and Uttar Pradesh, which saw sudden hike in COVID cases from April are showing reduced number of daily confirmed COVID cases. States continue to extend lockdowns and partial restrictions in the whole state or some cities, depending on COVID cases and positivity rates. Lockdowns have disrupted supply chains in Pune- Coverage universe Delhi route since the last week of April, while restrictions in South India further Companies CMP Reco. PT disrupted supply situations from mid-May. While OEMs continue to maintain robust (Rs) (Rs) production schedules with their respective suppliers and vendors, few OEMs have reduced Q1FY2022 guidance by 10%-20% due to the lockdown. However, OEMs Alicon Castalloy 574 Buy 700 remained optimistic for FY2022 growth, driven by strong underline demand, timely Limited # arrival of the monsoon season, and government initiatives to increase vaccination Amara Raja 738 Buy 1,146 drive in the country. Different OEMs have utilised the lockdown in different ways. Batteries Automobile manufacturers such as Maruti Suzuki, Hero MotoCorp, Hyundai Motor Apollo Tyres 224 Buy 290 India, and others have either stopped production at their factories or reduced output significantly, while some manufacturers such as Tata Motors and Bajaj Auto have Ashok Leyland 126 Buy 151 been continuing with production albeit with limited capacity. As Tamil Nadu started Bajaj Auto 4,246 Buy 4,589 two-week lockdown starting from May 10, 2021, several auto facilities were either Balkrishna 2,187 Hold UR closed for maintenance or productions were trimmed to avoid inventory pile up as Industries most sales markets across the country are already under lockdown. We expect OEMs to register 30%-60% lower dispatches compared to average normal monthly sales in Bosch 15,071 Buy 18,156 May, as far as domestic dispatches are concerned. Exports are expected to continue Exide Industries $ 189 Buy 229 to record strong momentum. Various OEMs assemble kits in export destinations Gabriel India 126 Buy 160 and, thus, are less impacted to domestic production. Maruti Suzuki has advanced its bi-annual maintenance shutdown to May 1- May 9 from June as planned earlier. GNA Axles 437 Buy 490 In the passenger vehicle segment, companies such as Maruti Suzuki, Tata Motors, Greaves Cotton 129 Buy 170 M&M, and others continue to manufacture vehicles to reduce the rise in waiting Hero Motocorp 2,994 Buy 4,030 periods for certain models across different states. Models such as the top-end Maruti Baleno and Swift, Tata Altroz and Nexon, Mahindra Thar, and Bolero have Lumax Auto 148 Buy 190 waiting periods ranging from two to ten months. It is expected that COVID-19 cases Technologies# will start to normalise gradually. We believe automobile OEMs and suppliers are M&M @ $ 828 Buy 1,000 well prepared to deal with the second wave of COVID-19 by managing the inventory Maruti Suzuki 6,964 Buy 8,587 and operations optimally. Moreover, government-led vaccination drive has taken centre stage after the rapid spike of COVID infections in wave-2. The faster rollout of Mayur 438 Buy 500 vaccinations will augur well for economic recovery. As far as demand is concerned, Uniquoters we expect pent-up demand will continue to drive growth for the automobile sector Ramkrishna 669 Buy 786 from Q2FY2022. Moreover, OEMs dependent on exports will be better positioned Forgings to drive volumes during the current scenario. We remain positive on the automobile sector and expect strong rebound in FY2022E. Schaeffler India 5,250 Buy 6,300 Sundram 799 Buy 850 Sector view Fasteners # FY2022 likely to witness strong recovery; Stay positive: The passenger vehicle Suprajit 266 Buy 329 segment, both for two-wheelers (2W) and four-wheelers (4W), is expected to remain Engineering # strong amid COVID-19, as a preference for personal transport. Rural demand is expected to recover strongly in southern and western India, given timely arrival of Tata Motors # 319 Buy 430 monsoon season, higher reservoir levels, and higher kharif sowing last year. Tractor TVS Motors $ 650 Buy 688 sales are likely to pick up, ahead of the summer crop. We expect a strong sequential Source: Company data, Sharekhan estimates improvement in M&HCV sales to continue, driven by rise in e-commerce, agriculture, @ MM & MVML; # Consolidated; $ core business valuation; infrastructure, and mining activities. We expect the strongest recovery in the CV UR Under Review segment in FY2022 and FY2023, driven by an improvement in economic activities, low interest rate regime, and an improvement in financing availability. We expect M&HCVs to outpace other segments in FY2022, followed by growth in the tractor, PV, and 2W segments. The bus and three-wheeler (3W) segments continue to remain Price chart under pressure due to closure of schools, colleges, offices, and lower use of public transport. We retain our Positive view on the sector. 150.0 125.0 Key risks 100.0 The fear arising of the second wave of COVID-19 in few states may result in further 75.0 extension of partial lockdown. Any significant delay in recovery from COVID-19 50.0 infection or vaccination rollout continues to be key risk going forward. 25.0 - Preferred picks: In the OEM space, we prefer rural-centric companies with a strong 20 21 20 19 20 20 21 balance sheet. In the 2W space, we prefer Hero MotoCorp because of positive ------sentiments in rural and semi-urban areas. In the PV space, we like Maruti Suzuki Feb Feb Aug Nov Nov May May Nifty 50 Nifty Auto and expect it to maintain its dominant market share and robust export growth. In the tractor segment, we like M&M, given its leadership in the tractor segment and Source: NSE India, Sharekhan Research its continued strong performance in other segments such as LCV and UVs. In the auto-ancillary space, we like Bosch (due to its extensive network and brand equity), Sundram Fasteners (beneficiary of strong growth traction in CV, PV, 2Ws, and tractor and its strategy to de-risk business from cyclicality), Suprajit Engineering (on account of increased share of business with existing clients and new client additions), Ramkrishna Forgings (beneficiary of CV upcycle in India, North America, and Europe), and Gabriel India (due to its leadership position and brand recall in the suspension components segment and focus on the e-mobility space).

May 27, 2021 1 Sector Update

Valuation EPS P/E (x) Company CMP Reco PT (Rs) FY20 FY21 FY22E FY23E FY20 FY21 FY22E FY23E Alicon Castalloy 574 Buy 700 12.7 (1.4) 31.2 53.8 45.0 NA 18.4 10.7 Limited # Amara Raja Batteries 738 Buy 1,146 38.7 36.3 43.8 50.5 19.1 20.3 16.9 14.6 Apollo Tyres 224 Buy 290 8.3 11.6 18.3 24.0 26.9 19.4 12.2 9.3 Ashok Leyland 126 Buy 151 0.8 (0.7) 2.9 7.0 154.4 NA 42.8 18.0 Bajaj Auto 4,246 Buy 4,589 176.3 157.5 189.5 218.5 24.1 27.0 22.4 19.4 Balkrishna Industries 2,187 Hold UR 48.9 59.8 75.4 87.4 44.7 36.6 29.0 25.0 Bosch 15,071 Buy 18,156 441.3 415.7 482.1 585.7 34.2 36.3 31.3 25.7 Exide Industries $ 189 Buy 229 10.0 8.9 12.7 14.1 15.6 17.4 12.2 13.4 Gabriel India 126 Buy 160 5.9 3.8 7.0 8.9 21.4 33.2 18.0 14.2 GNA Axles 437 Buy 490 24.6 32.9 37.1 42.6 17.8 13.3 11.8 10.3 Greaves Cotton 129 Buy 170 5.4 2.5 5.4 8.1 24.0 51.9 24.1 16.0 Hero Motocorp 2,994 Buy 4,030 181.9 145.8 191.0 212.1 16.5 20.5 15.7 14.1 Lumax Auto 148 Buy 190 7.3 6.8 9.7 11.9 20.2 21.7 15.3 12.5 Technologies# M&M @ $ 828 Buy 1,000 28.6 32.6 44.3 51.0 21.1 18.5 13.6 11.8 Maruti Suzuki 6,964 Buy 8,587 187.1 140.0 223.2 286.2 37.2 49.7 31.2 24.3 Mayur Uniquoters 438 Buy 500 17.6 19.6 24.2 29.4 24.9 22.3 18.1 14.9 Ramkrishna Forgings 669 Buy 786 3.0 8.8 29.1 49.1 223.0 76.0 23.0 13.6 Schaeffler India 5,250 Buy 6,300 117.6 93.1 140.5 185.3 44.6 56.4 37.4 28.3 Sundram Fasteners # 799 Buy 850 15.5 17.2 21.2 28.8 51.7 46.5 37.7 27.7 Suprajit Engineering # 266 Buy 329 7.4 9.6 13.4 16.5 35.8 27.7 19.9 16.2 Tata Motors # 319 Buy 430 (26.5) (3.6) 24.0 33.0 NA NA 13.3 9.7 TVS Motors $ 650 Buy 688 13.1 12.9 20.7 25.2 45.6 46.6 29.0 23.8 Source: Company data, Sharekhan estimates @ MM & MVML; # Consolidated; $ core business valuation; UR Under Review

Sector-wise performance Two-wheelers Š Hero MotoCorp’s volumes are expected to remain at ~2.2 lakh units in May 2021, reporting a 40% decline m-o-m. Sales are impacted by lower offtake in entry-level bikes, marred by facility shutdown, supply disruptions, and lower footfalls at the showroom due to rising fear of second COIVD-19 wave. However, we remain positive on Hero MotoCorp and expect it to deliver strong sales in FY2022. Hero MotoCorp remains focused on exports, premium bikes and scooters, which are new revenue drivers for the company. Š TVS Motors’ sales are expected to decline by 35% m-o-m to 1.6 lakh units in May 2021, affected by lockdown restrictions. However, we expect robust performance in the export segment for both 2W and 3W. Š Bajaj Auto’s monthly sales are expected at 2.7 lakh units, a decline of 30% m-o-m. Exports will continue to help the company to keep monthly run-rate at decent levels. Š Royal Enfield (RE) is expected to decline by 20% m-o-m in April 2021 to 42,638 units, driven by its robust order book. RE’s order book continues to remain strong, as online orders are increasingly auguring well for the company. Share of online sales has improved substantially to five times its online sales in pre- COVID times. Š Overall outlook for the sector remains positive. We expect demand from rural and semi-urban areas to improve in FY2022. We see lockdown restrictions as temporary measures and normalcy would take place in due course. All major 2W OEMs have undertaken price hike of 2%-5% this year. 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.

May 27, 2021 2 Sector Update

Three Wheelers Š Demand recovery in the 3W segment continues to remain slow. The 3W industry is expected to gain demand, as COVID-19 situation normalises. The opening of schools, educational institutions, corporates, and local/metro trains will be key catalysts for demand. Š However, we expect 3W exports to remain buoyant and help OEMs mitigate the slow recovery in domestic demand. Š Bajaj Auto is witnessing strong recovery in export demand, driven by a robust order book. Passenger vehicles Š Few OEMs have reduced production targets by 10%-20% for Q1FY2022, while they have maintained robust growth expectation for FY2022, aided by pent-up demand and preference for personal mobility amidst COVID-19. Š Passenger vehicle manufacturers such as Maruti Suzuki, Tata Motors, M&M, and others continue to manufacture vehicles to reduce the rise in waiting periods of certain models across different states. Models such as the top-end Maruti Baleno and Swift, Tata Altroz and Nexon, Mahindra Thar, and Bolero have waiting periods ranging from two to 10 months. Š Maruti Suzuki’s monthly sales are expected at ~35,000 units in May 2021, due to 16 days shutdown and oxygen shortage, which is needed for the production of CNG vehicles. Tata Motors and M&M are expected to deliver a 40%-60% m-o-m decline in May 2021. Š Channel checks with dealers suggest strong order book in the passenger vehicle segment. However, retail deliveries are getting impacted by supply issues and shutting down of dealer showrooms due to government restrictions in some states. Š The export market continues to remain buoyant and will witness better sales. Š Shutdowns of manufacturing facilities and lockdowns impacted retail sales of major OEMs including Maruti Suzuki, M&M, Tata Motors, Hyundai Motors, and others. Tractors Š On similar lines, we expect the tractor industry to show a sequential decline of 30%-40% m-o-m in May due to lockdown restrictions. We expect M&M and Escorts tractor sales to be around 11,427 units and 6,000 units, respectively, in May 2021. Š We remain positive on the tractor industry, driven by improvement in farm income during the year. Rural demand is expected to be strong in southern and western India, given higher kharif sowing and a copious monsoon, both of which are crucial for these regions. Tractor sales are likely to pick up, ahead of summer crops. Commercial Vehicles Š We expect a 10-40% m-o-m decline in commercial vehicle (CV) players. Š Tata Motors, Ashok Leyland, and Eicher Motors are expected to dispatch 14,492 units, 5,004 units, and 1,287 units, respectively, in May. Š We have been witnessing strong sequential improvement in M&HCV sales since August due to rise in e-commerce, agriculture, infrastructure, and mining activities. Q1FY2022 is an aberration due to lockdown restrictions imposed by state governments. Š We continue to remain positive on the CV sector and expect a rebound in FY2022E as the situation of COVID wave-2 recedes, driven by increasing economic activities, improving sentiments of fleet owners, and a lower cost of ownership under BS-VI vehicles. Š OEMs’ digital initiative 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 40%-45% in FY2022 after a ~30% decline in FY2021. Š Demand for ICV and LCV remains strong and would continue to drive industry growth.

May 27, 2021 3 Sector Update

Company-wise expectation for May 2021 ^Residual Maruti Suzuki May-21 May-20 YoY(%) Apr-21 MoM(%) YTD FY22 YTD FY21 YoY(%) YoY(%) FY22E YoY(%) 10M FY22 Dom PV 25,500 13,888 83.6 142,454 -82.1 167,954 13,888 1109.3 165,845 23 1,683,949 23.7

Exp PV 10,000 4,651 115.0 17,237 -42.0 27,237 5,283 415.6 9,800 7.1 108,000 12.3

Total Sales 35,500 18,539 91.5 159,691 -77.8 195,191 19,171 918.2 175,645 22.0 1,791,949 22.9 ^Residual M&M May-21 May-20 YoY(%) Apr-21 MoM(%) YTD FY22 YTD FY21 YoY(%) YoY(%) FY22E YoY(%) 10M FY22 UV 7,274 3,745 94.2 18,186 -60.0 25,460 3,745 579.9 21,293 40.3 220,200 41.6

Cars + Vans 40 122 -67.5 99 -60.0 139 122 13.6 46 (71) 500 (70)

LCV < 3.5T 5,508 5,121 7.6 13,771 -60.0 19,279 5,121 276.5 19,599 33.5 201,500 32.7

LCV 3.5T> + MHCV 133 49 171.8 333 -60.0 466 49 851.4 688 63 7,010 64

3W 817 39 1995.4 2,043 -60.0 2,860 39 7233.8 3,968 94 40,500 97

Total Dom 13,773 9,076 51.7 34,432 -60.0 48,205 9,076 431.1 45,594 40.4 469,710 40.7

Exp 1,203 484 148.6 2,005 -40.0 3,208 1,217 163.6 1,980 -91.2 21,000 14.2

Total Auto 14,976 9,560 56.7 36,437 -58.9 51,413 10,293 399.5 47,573 -13.3 490,710 39.3

Tractor 11,427 24,341 -53.1 27,523 -58.5 38,950 29,113 33.8 36,702 11.2 378,450 6.8

Total Sales 26,403 33,901 -22.1 63,960 -58.7 90,363 39,406 129.3 84,276 -4.1 869,160 23.0 ^Residual Tata Motors May-21 May-20 YoY(%) Apr-21 MoM(%) YTD FY22 YTD FY21 YoY(%) YoY(%) FY22E YoY(%) 10M FY22 CV 14,492 - NA 16,644 -12.9 31,136 - NA 33,792 30.6 352,410 36.2

PV 15,057 NA 25,095 -40.0 40,152 - NA 23,919 7.7 254,250 14.5

Total Sales 29,549 - NA 41,739 -29.2 71,288 - NA 57,711 20.0 606,660 26.2 ^Residual Escorts May-21 May-20 YoY(%) Apr-21 MoM(%) YTD FY22 YTD FY21 YoY(%) YoY(%) FY22E YoY(%) 10M FY22 Total Sales 6,000 6,594 -9.0 6,979 -14.0 12,979 7,299 77.8 11,210 11.9 118,100 10.6 ^Residual Ashok Leyland May-21 May-20 YoY(%) Apr-21 MoM(%) YTD FY22 YTD FY21 YoY(%) YoY(%) FY22E YoY(%) 10M FY22 MHCV 2,600 266 877.4 4,333 -40.0 6,933 266 2506.3 8,651 67.8 89,111 72.0

LCV 2,404 1,154 108.3 4,007 -40.0 6,411 1,154 455.6 7,341 53.7 75,810 55.0

Total Sales 5,004 1,420 252.4 8,340 -40.0 13,344 1,420 839.7 15,992 61.0 164,921 63.7 ^Residual Eicher Motors May-21 May-20 YoY(%) Apr-21 MoM(%) YTD FY22 YTD FY21 YoY(%) YoY(%) FY22E YoY(%) 10M FY22 CV 1,287 686 87.6 2,145 -40.0 2,145 85 2423.5 6,495 57.8 64,950 57.8

2W Royal Enfield 42,638 19,113 123.1 53,298 -20.0 95,936 19,204 399.6 73,554 24.0 778,180 27.1 ^Residual Hero Motocorp May-21 May-20 YoY(%) Apr-21 MoM(%) YTD FY22 YTD FY21 YoY(%) YoY(%) FY22E YoY(%) 10M FY22 Total Sales 223,371 112,682 98.2 372,285 -40.0 595,656 112,682 428.6 628,520 10.7 6,508,576 12.4 ^Residual Bajaj Auto May-21 May-20 YoY(%) Apr-21 MoM(%) YTD FY22 YTD FY21 YoY(%) YoY(%) FY22E YoY(%) 10M FY22 Dom 2W 88,599 39,286 125.5 126,570 -30.0 215,169 39,286 447.7 200,958 13.5 2,098,175 16.0

Exp 2W 155,122 73,512 111.0 221,603 -30.0 376,725 105,521 257.0 200,070 16.1 2,155,822 20.0

Total CV 27,890 14,330 94.6 39,843 -30.0 67,733 20,199 235.3 42,924 21.7 457,129 24.6

Total Sales 271,611 127,128 113.7 388,016 -30.0 659,627 165,006 299.8 443,952 15.4 4,711,126 18.6 ^Residual TVS Motors May-21 May-20 YoY(%) Apr-21 MoM(%) YTD FY22 YTD FY21 YoY(%) YoY(%) FY22E YoY(%) 10M FY22 2W 147,025 56,218 161.5 226,193 -35.0 373,218 64,352 480.0 312,275 9.0 3,269,774 12.0

3W 8,314 2,688 209.3 12,790 -35.0 21,104 4,194 403.2 13,170 10.3 140,009 14.7

Total Sales 155,339 58,906 163.7 238,983 -35.0 394,322 68,546 475.3 325,444 9.1 3,409,783 12.1 ^ Monthly runrate Source: Company data, Sharekhan estimates

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May 27, 2021 4 Know more about our products and services

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