Encouraging inquiries across segments in seasonally weak month…
…inventory build-up for potentially strong festive season
* As per the Indian custom, the Sep’20 periods of Shradh (from 2nd to 16th) and Adhik Maas (18th Sep to 16th Oct) are deemed inauspicious. Nevertheless, demand saw positive momentum, and OEMs utilized this period for inventory refilling. Sustained demand recovery was seen owing to a growing preference for personal vehicles, high disposable incomes in the rural markets, and improving recovery in the urban markets. Utilization levels improved on MoM basis at most OEM plants in Sep’20.
* Our interaction with leading industry channel partners indicates 2W inventory has reached 30–45 days on the expectation that sales momentum would continue into the festive season and PV inventory would sustain at a comfortable level of 20–30 days. Inquiries were encouraging and better than last year. LCV demand has recovered and is now moving toward growth momentum. M&HCV has seen demand only from the Infrastructure/Construction sector, accounting for ~30% of total sales. While overall consumer sentiment has improved, urban customers remain cautious given an uncertain environment.
* Wholesale in Sep’20 is expected to grow on a YoY basis for all segments (ex-M&HCV), driven by sound demand, low starting inventory, a low base, and normalizing production. Demand recovery is skewed toward the semi-urban and rural markets for 2W/PV. Demand in Tractors remains strong, with growth seen in Retail in most of the markets.
* 3W demand remains very low, further affected by stringent financing norms and a weak business environment for owners/operators.
* In Sep’20, wholesale volumes are estimated to grow at ~10%/~23% for 2W/PV on account of sustaining demand and inventory refilling. Decline in CV (ex-Tata) was arrested at ~6% YoY – decline was offset by ~10% growth in LCV and slower decline of 19% YoY in M&HCV. Tractors volumes are expected to grow by ~16% YoY. Wholesale would be much strong than Retail owing to inventory refilling to meet upcoming festive demand.
* 2W: During this seasonally slow month, OEMs (ex-RE) replenished inventory at the dealer’s end for the upcoming festive season. Inventory has reached 30–45 days. On a like-to-like basis (Shradh period), inquiries and bookings were better v/s last year. We expect wholesale to be flat for RE, majorly due to supply-side constraints and growth of 3.5% in Bajaj (10% growth in dom. 2W) – 10% for Hero and TVS each.
* PV: PV retail was better than expected despite the inauspicious Shradh and Adhik Mass periods falling in the month. MSIL is comparatively better placed v/s peers owing to its entry-level portfolio. Volumes are expected to grow by ~28.5% for MSIL (on a low base) and be flat for M&M’s UV (incl. Pick-ups).
* CV: OEMs are refilling their inventory across channels with the supply chain normalizing. Demand from Infrastructure/Construction is nearing normal levels, with encouraging inquiries received. Moreover, a good portion of this demand is attributable to small fleet operators closing their businesses and not owing to increased capacity utilization. However, due to stringent norms, financing is proving to be a bottleneck in catering to demand. Demand in the M&HCV Cargo segment is still very low due to excess capacity. LCV and SCV demand remains at 70–90% of preCOVID levels; however, inventory is very low. We expect wholesale for AL to decline by 1.6% YoY (-20% for M&HCV).
* Tractors: Demand in this segment remains encouraging due to a good rabi harvest, good reservoir levels, forecast for normal rains, and kharif crop sowing being brought forward by a few days. Dealers were able to increase their inventory (on the back of improved supplies and comparatively lower retail) to prepare for the festive season. We expect tractor volumes to grow ~10% YoY for M&M and 25% for Escorts on a high base.
* Valuation and view: While the upcoming festive season is expected to be very good, the sustenance of demand post the festive season is the key parameter to monitor. Valuations reflecting recovery from 2HFY21, leaving limited margin for safety for any negative surprises. Hence, 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. M&M and HMCL are our top OEM picks. Among the auto component stocks, we prefer MSS and ENDU.
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