Published on 7/06/2022 3:42:29 PM | Source: JM Financial Services Ltd

Monthly Auto Sector Update - Robust PV/CV demand; Tractor momentum continues; Entry-level 2W picks up; supply normalization – a key By JM Financial Services

Posted in Broking Firm Views - Sector Report| #Auto Sector #Sector Report

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Robust PV/CV demand; Tractor momentum continues; Entry-level 2W picks up; supply normalization – a key

In May’22, all major OEMs witnessed sequential improvement in volumes supported by positive sentiments and marginal improvement in component supplies. PV OEMs' volume improved on robust demand. MSIL reported marginal improvement in wholesale volumes (+2%MoM) in domestic PV. Based on our channel checks (PV demand remains robust; Entry-level 2Ws gaining momentum), we found underlying demand to be strong along with high outstanding bookings. In case of 2Ws, entry level segment witnessed strong MoM sales on improving rural sentiments and marriage-season demand. 2W export demand was affected by freight availability and currency volatility. Near-term 2W domestic demand is contingent on continuation of sales movement post the marriage season. In the CV segment, MHCV remained steady as fleet operators’ sentiment continue to improve based on pick up in infrastructure activities and correction in fuel prices. Bus volumes picked up on rising demand from STUs. Domestic Tractor volumes witnessed strong double-digit YoY growth. Tractor demand is likely to be supported by record kharif sowing and normal monsoon forecast.

In PV segment, wholesales in near-term are likely to be a function of normalisation of chip supply and new model launches. 2W demand remains contingent on rural sentiments. Sequential increase in freight rates (since Jul’21) has supported the profitability of CV operators and the effect of recent correction in fuel prices will likely be seen in the coming months. We expect CV volumes to be supported by demand from infrastructure and construction sectors.

PVs – gradual improvement in supplies even as chip shortage continues; demand remains robust: PV volumes improved sequentially even as it continue to remain impacted by component shortage. MSIL reported domestic PV wholesales of c.124k units (+3x YoY, +2% MoM). PV Exports accelerated further with MSIL reporting monthly sales of c.27k units (+141%YoY, +48%MoM). MSIL highlighted that electronic components had a minor impact on vehicle production (mainly on domestic models) in May’22. TTMT and M&M reported total PV sales of c.43k units (+185%YoY, +4% MoM) and c.27k units (+236%YoY, +19% MoM), respectively. EV sales for TTMT stood at c.3.5k units (6x YoY, +49% MoM). M&M highlighted that it continues to witness strong bookings and has a robust pipeline even as supply issue continue to constraint volumes. Hyundai / Kia domestic PV sales stood at 42k/19k (-4%/-1.5% MoM) due to capacity constraints while for MG, it grew by 100% MoM. MG management highlighted that there was an improvement in chip availability, however, the production remains impacted due to the global COVID-19 lockdown.

2Ws – entry-level models gather traction: 2W sales improved MoM led by entry level segment improvement owing to positive rural sentiments and marriage-season demand. In the domestic 2W segment, HMCL/BJAUT/TVSL registered improvement of 16%/3%/6%MoM while RE registered a decline of 1%MoM. In case of 2W exports, volumes declined -19%/-4% MoM for BJAUT/TVSL owing to 1) freight availability issue and 2) currency volatility while HMCL/RE reported an improvement of 1%/22% MoM. HMCL expects positive demand trend to continue in coming months on the back of improving consumer sentiment. However, launch of first EV product by HMCL is postponed to festive period (instead of July) due to supply chain issues. Bajaj Auto’s management highlighted that it faced 40% shortfall in May due to semiconductor shortage and indicated normalization in volumes led by improvement in supplies of semiconductor from July’22 onwards. Management highlighted that channel inventory remains low. E2Ws continued to gain market share with increasing penetration in Tier 1 and Tier 2 cities along with metro cities. Momentum in the coming months would be contingent upon a) availability of components, b) production capacity and c) response to new EV launches.

MHCV posts steady volumes; Bus/LCV volumes pick up: CV segment has been on a path to recovery since last few months. MHCV volumes remained steady in May as fleet operators’ sentiment continue to improve based on pick up in infrastructure activities and correction in fuel prices. Bus volumes improved in May on rising demand from STUs with the opening up of schools/offices. Total CV volume for AL / TTMT / MM / VECV improved 11%/5%/22%/6% MoM. In the MHCV segment, AL / TTMT / MM / VECV reported volume decline of 2%/1%/10%/16% MoM. For LCV, AL / TTMT / MM volumes increased 26%/1%/23% MoM while VECV reported 1% MoM decline. Bus volumes for AL / TTMT / VECV improved 135%/70%/65% MoM. Overall, we expect CV sales to improve going forward driven by a) improving fleet operator’s profitability on gradual freight hikes and the benefit of recent correction in fuel prices, b) rising BUS orders from STUs and c) increasing demand for CNG vehicles.

Tractors – continued demand momentum supported by positive sentiments: Tractor volumes registered strong double-digit growth YoY on a reasonable base driven by a) higher crop realization for rabi crop and b) positive sentiments on account of normal monsoon forecast. M&M domestic sales stood at c.34k units (+50% YoY, - 13%MoM) while Escorts reported domestic sales of c.7.7k units (+25% YoY, flat MoM). M&M reported export growth of 2%MoM while Escorts reported growth of 16%MoM. M&M management highlighted that rural sentiments continue to remain positive supported by a) timely arrival of the south-west monsoon and forecast of a normal monsoon and b) expectations on record kharif crop production. Escorts management indicated that rural sentiments are gradually improving on account of better crop price realization and forecast of normal rainfall and possible timely sowing of harvest crop.


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