Technical analysts expect a consolidation before the next upmove. “Short term momentum indicators have started showing weakness after reaching the overbought zone. Nifty needs to consolidate for a few sessions before the the next upmove takes it to the June target of 16,000,” says Gaurav Ratnaparkhi, Senior Technical Analyst at Sharekhan.
Since the Centre has decided take responsibility of covid vaccination, the vaccination drive is expected to gain momentum. This will also encourage states to end lockdowns. “With many states starting to ease restrictions, we expect the demand environment to improve,” says Siddhartha Khemka, Head – Retail Research, Motilal Oswal Financial Services. Among the possible sectors in the unlock trade theme, auto is dragging because its numbers for the month of May were much below the market expectations.
(Narendra Nathan/ET Bureau)
Sector update: Auto
Single-digit growth for tractor makers
After witnessing 10% CAGR in the past 15+ years, tractors’ growth will moderate to 5-6% over the next decade. During this period, tractor penetration in the country increased to 45-50 tractors per 1,000 hectares, higher than the world average. Meanwhile, India’s landholding remains fragmented, with 86% of farmers owning under 2 hectares. Cyclicality will increase, due to higher replacement demand in overall sales and increased dependence on small farm owners for new sales. Based on our assessment, replacement sales will account for nearly 50% of total sales.
Estimates indicate tractor sales will reach 1.2-1.5 million units by 2029-30, implying moderation of industry growth rates to 4-6% over the current decade. The share of first-time buyers will reduce from around 65% today to 50%. Further, the share of replacement demand would increase to a higher proportion of sales.
As larger farms have reached a high degree of tractor penetration, new tractor sales will be driven by small farmers owning less than 2 hectares. These farmers have relatively limited resources and incomes that are subject to external factors. Further, as the share of replacement demand increases in the overall mix, the industry cyclicality will increase.
At present, replacement demand is the highest in the northern states. Stock outlook: We currently have an ADD rating on Escorts and Mahindra & Mahindra. At Escorts, the management has indicated that the tractors industry could grow in low single-digit in 2021-22; at present, we await more clarity on the company’s capital allocation plans. At Mahindra, we believe moderation in tractor volumes in 2021-22 would be offset by a pick-up in the core SUV segment sales, driven by launches.