EUR 120.00 For Business Accounts Only

MOSL: AUTOMOBILES-Rural recovery on anvil, tractors and PVs better positioned; BS6 could be hurdle for 2Ws

Automobiles: Rural recovery on anvil, tractors and PVs better positioned; BS6 could be hurdle for 2Ws

 

• Initial signs of the rural sector bottoming out are emerging, as indicated by the return of higher food inflation, favorable ‘terms of trade’ for farmers, multi-year higher rural spending by the Center, unusually high water reservoir levels and good start to the Rabi crop season.
• We believe that tractors are best placed to benefit from the rural recovery on high correlation with farm economics as well as due to no BS6 related challenges. ESC is our preferred pick in tractors.
• MSIL, with 40% rural contribution to sales, is relatively better positioned to benefit from the rural revival with apt product portfolio as well as unparalleled reach.
• In the normal course, 2Ws would have benefitted the most from the rural recovery. However, 10-15% cost inflation in mainstream 2Ws should dilute benefit of rural recovery.

Rural outlook improving…

• Higher food inflation augurs well for rural markets, as it reflects the prices (higher) fetched for their output. Not only retail food prices, but wholesale food prices have also increased at 6-year highest pace in 8MFY20.
• Moreover, while farm output prices (at wholesale level) increased sharply at 7.3% in Apr-Nov'19, farm input prices declined slightly during the same period, implying better profitability for the farm sector in FY20 after 2 years of declining margins (FY18-19).
• Interestingly, the central government's spending on the rural sector has increased ~21% YoY in 7MFY20 (Apr-Oct'19), marking the fastest growth in 11 years. It was >13% of total spending, the highest in 8 years.
• Combining the above mentioned facts with unusually strong water reservoir levels and pick-up in Rabi crop sowing activity, there are sufficient initial signs pointing toward the rural sector bottoming out.