Geographical deep dive into Covid impact: PV to decline 20%
In this report we take a deeper state/district-wise look into demand and supply aspects arising from the heterogeneous nature of Covid-19 spread. Key observations include: 1) FY20 concentration of retail demand in risk areas (Red) remains high for both PVs and 2Ws at ~36% and ~30% respectively; however, demand and spread skews across states adds to heterogeneity; (2) state-wise analysis suggests >30% of wholesale despatches could be disrupted as these high-risk states remain large contributors to overall volumes; (3) interestingly, most of the high per-capita income states are facing the worst of the spread (tables: 4-5) and this could act impact high-ticket discretionary spend; (4) on supply chain side, we see a meaningful overlap (~80% and 60% in PVs and 2Ws respectively) between the manufacturing footprint and the risk zones. Impact of unknowns, e.g. ‘reverse labour migration / rise in infections’ are key monitorables over the coming period.
Cut in industry growth estimates: We have reduced our volume growth estimates for the sector. We model PV segment decline of ~20% (from 2% earlier) and 2W segment decline of ~16% (from 2%). The relatively lower drop in 2Ws is primarily due to: a) lower demand exposure to risk zones; b) rural incomes likely to hold up better (driven by essential activities like agriculture) vis-à-vis urban (2Ws draw a higher demand share from rural); c) affordable mass-market segment is likely to partially benefit from any public transportation driven demand substitution by mid/low-income travellers. As a theme, we prefer mass market 2W/tractor vis-à-vis PV/CV companies. Stock calls: Post the recent rally, we downgrade mass-market 2W stocks Hero Motocorp and Bajaj Auto to ADD, retain our BUY rating on M&M, TVS and Eicher Motors. We retain SELL rating on Maruti Suzuki.
* Trends in red zone pivotal for retail demand trends: The share of retail sales from red zones (read highest risk) is nearly ~1/3rd of overall demand in FY20 (tables 2-3). On segmental basis for PVs and 2Ws, the same is at ~35% and ~30% respectively. Interestingly, a few states have large skews between share of retails vis-a-vis share of districts marked in red zone, e.g. Karnataka and Gujarat have only 27% and 10% of districts in red zones; however, in terms of volume share, these two states account for ~48% and 52% of overall state retails for PVs. Another large skew is in Bihar (not in top-10 most affected states) where only 14% of districts are in red zone but those regions contribute ~38% of overall state PV retails. The red zones with lockdown extension till 31st May could face further slip in consumer confidence.
* Top-5 most affected states; impact on wholesales: Statistics around these states are quite interesting (tables 4-5); they currently have ~74% of the confirmed Covid19 cases with only ~27% of overall country’s population. They however contribute ~40% to per capita income; the average per capita income of these five states is ~67% higher than the national average of Rs126.5k. These five states’ GSDP shares in the overall country’s manufacturing / services / construction are quite high at ~49% / 40% / 36% respectively. However, for agriculture their share is only ~27% of overall agriculture GDP. The average unemployment across these states has risen sharply by ~19% YoY to 25% in Apr’20; they contribute ~36%/32% (FY19) of overall demand in PV/2W segments. In summary, growth/employment and auto sales rebound in these states would largely depend on services and manufacturing sectors.
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