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Published on 26/10/2021 12:32:58 PM | Source: Motilal Oswal Financial Services Ltd

Auto Sector Update - PV demand remains strong; 2W demand down By Motilal Oswal

Posted in Broking Firm Views - Sector Report| #Auto Sector #Sector Report #Motilal Oswal Financial Services Ltd

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PV demand remains strong; 2W demand down

…PV retails let down by chip shortage

* Navratras (from 7th Oct to 15th Oct) marked the start of the festival season and is an important time of year for automobile retail sales. We interacted with leading industry channel partners to understand the demand trends in PVs and 2Ws that are panning out. PV demand remains strong, but affected by supplyside constraints. 2W retails remain tepid due to high total ownership costs (TCO) and a cash crunch in the prime customer segment.

 

* Registration data from Vahan for Navratras confirms the above trend. While 2W retails in Navratras’21 saw a 17% CAGR decline (v/s Navratras’19; 17% decline YoY); PV retails recovered to FY20 levels, while they declined 22% YoY. The decline was largely attributable to the semiconductor shortage.

 

* 2Ws: Retails in Navratras’21 are estimated to decline 10–20% YoY, in line with dealers’ expectations, due to no pent-up demand like last year and a liquidity crunch in the customer base of the 2W segment. Higher fuel prices are restricting the pace of recovery, consequently driving customers’ interest in escooters, supported by subsidies. Rural demand is expected to pick up during the Diwali season as farmers are currently engaged in harvesting crops. Economy and Executive (up to 125cc segment) were better off than premium offerings. TVS Raider 125 / TVS Jupiter 125 / Hero Pleasure Xtec are receiving customer interest. While RE is seeing good traction in the number of inquiries, but retail sales are impacted by supply-side constraints. Discounts were similar to last year’s festive season. Inventory in the system was around 40–60 days.

 

* PVs: Retail sales have declined YoY as the semiconductor shortage continues to play spoilsport to the strong demand for PVs, eventually leading to high waiting periods. The semiconductor availability situation is expected to improve MoM. Inquiry levels are healthy and OEMs have a strong order book. The preference for CNG-powered vehicles continues to grow, driven by high fuel prices and the increased penetration of CNG stations at new locations.

M&M’s XUV700 has seen an overwhelming response from consumers since bookings opened up on 7 th Oct; it currently has a waiting period of over one year. Bookings for Tata Punch have commenced and the model is seeing good traction as the company has projected it as a ‘mini SUV’. Nexon continues to be a hot seller for Tata, while Altros is available with a 1–2 month waiting period. MSIL’s dealers expect the upcoming Celerio launch to boost sales. CNG models continue to command the highest waiting periods, while other high-selling models’ waiting periods remain higher than 1–2 months. Discounts given during Navratras’21 were lower than last year. Inventory in the system stands at around 10–20 days.

 

* Valuation and view: The semiconductor shortage is expected to continue 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 PV demand remains strong and offers a stable competitive environment. 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 pick. Among the auto component stocks, we prefer BHFC and APTY.

 

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