Cautious confidence for auto industry

Cautious confidence for auto industry ahead of festive season  

This follows sluggish retails during Ganesh Chaturthi due to supply-side restrictions for PVs and slow demand for 2Ws

Credit: Reuters Photo

Discussions with top industry channel partners reveal cautious confidence for the approaching festive season. This is following sluggish retails during Ganesh Chaturthi due to supply-side restrictions for PVs and slow demand for 2Ws, according to a report from Motilal Oswal Financial Services Limited. 

The report added that due to supply-side challenges, passenger vehicle and Royal Enfield are concerned about missing out on a portion of their festive sales.  

“PV demand has held steady, although 2W demand has yet to recover fully. The rise in construction activities, particularly in the residential housing segment, is helping to boost M&HCV demand. The demand for tractors has remained quite consistent," it said.  

“PV demand remains strong and CV demand is showing good signs of recovery. Tractor demand is largely stable, while 2W demand is yet to recover. Retails during Ganesh Chaturthi were lower on a YoY basis. Sep ’21 saw the start of the Shraddh period from 21st Sep ’21, which would end by 6th Oct – this has affected inquiries and bookings. 

“Wholesale volumes for 2Ws are expected to drop 21% YoY, 32% YoY for PVs, and 12% YoY for tractors in Sep '21. On a low base and negligible impact of supply-side concerns, CV wholesales are expected to rise 26.5 % YoY (LCV by 5% YoY and M&HCV by % YoY) and 3W by 22 % YoY (barring LCV)," it added.  

When it comes to two-wheelers, the report said: “Demand for 2Ws is improving at a sluggish pace. Higher fuel prices are restricting the pace of recovery, consequently driving customers’ interest in e-scooters, supported by subsidies. New launches such as RE Classic 350 and TVS Raider (125cc) have been garnering customer interest.  

“Semiconductor availability issues are impacting >150cc segment volumes – they are impacting RE the most as other OEMs have sailed through owing to high inventory in the system, which stands at around 45–50 days. We expect wholesales to decline 16.5% YoY for BJAUT 2Ws, 6% YoY for TVS, ~27% YoY for HMCL, and 63% YoY for RE,” it added.  

As far as passenger vehicles are concerned, the report said: “Demand for PVs remains strong. However, sales are hampered by supply chain constraints, leading to high waiting periods for some of the high-selling models. Semiconductor availability issues may start to resolve from Oct ‘21 with the resumption of chip manufacturing factories in Malaysia.  

“Inquiry levels are healthy and OEMs have strong order books. Demand for CNG vehicles remains strong, benefitting from surging fuel prices and the increased penetration of CNG in newer cities. Inventory in the system stands at around 10–20 days. Volumes are expected to decline 40% for MSIL and 31% for M&M (UVs including pickups), but grow 29% for TTMT’s PV business," the report added.  

Looking ahead, the report said: "The semiconductor shortage is expected to persist in 2HFY22. Although, supplies would improve from the lows of Sep ’21, resulting in potential earnings downgrades in FY22 estimates. We prefer 4Ws over 2Ws as PVs are the least impacted segment currently and offer a stable competitive environment. 

“We expect the CV cycle to recover and gain momentum towards 2HFY22. We prefer companies with: a) higher visibility in terms of demand recovery, b) a strong competitive positioning, c) margin drivers, and d) balance sheet strength. MSIL and TTMT are our top OEM picks. Among the auto component stocks, we prefer BHFC and APTY,” it added.

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