Published on 2/06/2020 3:13:28 PM | Source: Motilal Oswal Financial Securities Ltd

Auto Sector Update - Industry limping back from lockdown’s impact by Motilal Oswal

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

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Industry limping back from lockdown’s impact…


…as both demand and supply side restart in constrained manner

After almost zero sales in Apr’20 due to the complete lockdown, the Indian Auto industry has restarted operations (both plants and dealerships) partially, even as it adheres to new operating norms. For Apr’20, most OEM plants were operating at <30% average utilization while <50% dealer outlets were operational (except tractors, which had 60-70% operational dealerships).

* Our interaction with leading industry channel partners indicates 2W/PVs are seeing resurgence in inquiries (~50% of normal at operational dealerships). On the other hand, CVs are seeing negligible demand (from construction sector only). Overall consumer sentiment is low and even in rural markets, customers are cautious with spending given the uncertain environment.

* Wholesales are expected to decline substantial in May’20 for all OEMs due to (a) the lockdown, (b) absence of non-discretionary demand, and (c) supply constraints. While demand for 2Ws and PVs is seeing some recovery from semi-urban and rural markets, CVs have minimal demand due to low economic activity and cautious financiers as many operators have already opted for moratorium. Also, to lend to CVs/3Ws, financiers currently are stringent and highly risk averse.

*  In May’20, wholesale volumes are estimated to decline ~77%/~77%/~90% YoY for 2Ws/PVs/CVs due to the lockdown and low demand. Tractors volumes are expected to decline by ~71% YoY.

* 2Ws:

Demand is returning driven by (a) preference for personal vehicles rather than the public transport, and (b) higher disposable income in rural market due to good harvest. While this could be an initial spurt in demand, sustenance of the same is a key monitorable. We expect wholesales to decline 73% YoY for BJAUT (75% fall in domestic 2Ws), 76% YoY for TVSL, 80% for HMCL and 75% for RE, majorly due to the lockdown.


* PVs:

Post the gradual lifting of lockdowns sales have recovered slightly, largely due to conversion of pre-lockdown bookings. MSIL is in a comparatively better position than peers due to its entry-level portfolio. Volumes are expected to decline ~74% for MSIL. Wholesales should decline ~85% YoY for M&M UVs (incl. pick-ups) and ~86% for TTMT PVs due to the lockdown.

* CVs:

The CV segment is the hardest hit due to low economic activities. Our channel checks suggest that MHCVs have seen marginal demand only from the construction segment and are not expected to recover before the festive season. This is due to (a) BS4 pre-buying in 4QFY20, (b) price hike of 16-18% on BS6 (12-13% cost inflation + 3- 5% due to discount withdrawal), (c) depressed fleet utilization, and (d) stringent financing norms. We expect CV wholesales to decline ~91% for TTMT (-95% for M&HCVs) and ~92% YoY for AL (-95% for M&HCVs).

* Tractors:

The Tractor segment was better off than others due to good Rabi harvest, robust reservoir levels and forecast of normal rains supporting demand along with comparatively relaxed lockdown norms, which has supported supply. We expect tractor volumes to decline ~70% YoY for M&M and ~75% for Escorts due to supply-side constraints


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