Teji Mandi: Three things investors should know on November 2, 2020
Teji Mandi

1) Automobile sector: Entry-level segment, rural market drives the growth

The demand for entry-level vehicles in the two-wheeler and passenger vehicle category continued to improve in October. HeroMoto sold 8,06,848 units in October 2020 from 5,99,248 units a year ago, reflecting 35% growth.

While Maruti Suzuki's sales also grew by 19% for the month.

However, the demand for premium vehicles continues to remain weak. Total sales of Royal Enfield was 7% down in October 2020 to 66,891 units.

Both HeroMoto and Maruti Suzuki are market leaders in the entry-level segment with high rural penetration.

We think that the strong performance from HeroMoto and Maruti Suzuki reflects two major trends:
1) Strong demand for entry-level vehicles in the market and
2) The Rural market outperforming the urban centers.

2) Sharp rise in manufacturing activities; PMI shows highest monthly expansion in 13 years

India’s manufacturing sector activity improved for the third straight month in October The headline manufacturing Purchasing Managers’ Index (PMI) rose from 56.8 in September to 58.9 in October.

The output rise in October was at the quickest pace since October 2007.

This data indicates a sharp rise in manufacturing activities after falling as low as 27.80 in April.

In PMI terms, a print above 50 means expansion, while a score below 50 denotes contraction in the economic activity.

The October data reflects a sharp rise in industrial activities after the COVID-19 restrictions. The economy is witnessing better market conditions and improved demand.

With this data, India's annual GDP outlook has also improved. Currently, the Indian economy is estimated to see a 10% contraction for the current financial year.

However, if the economy continues to improve at this pace, we think that the impact of the Covid Induced lockdowns on our GDP could be less severe than expected.

3) Positive Private Banks earnings: Asset quality remains intact, for now:

The September quarter earnings of private banks and management commentaries that followed have brought huge relief to the market.

The number of loans under moratorium have declined and collection efficiencies have reached pre-covid levels.

The banks are seeing the possibility of seeing 3-4% loans going for restructuring. This is significantly lower than what was initially feared.

Here, the most encouraging is the flat numbers of non-performing assets (NPAs). The banks have reported a sharp decline in NPAs, helped by the Supreme Court’s

Guidelines. It is important to note that SC is currently hearing on the “Interest on Interest” case and it has restricted banks from identifying fresh NPAs till further orders. As a result, NPAs have declined for all the banks.

It was feared that without SC’s intervention, NPAs would have skyrocketed for most banks. We think this is still an uncertain situation for the banking sector and we can only wait and watch as the pandemic progresses.

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