05-01-2021 12:12 PM | Source: ICICI Securities Ltd
Auto Sector Update - Va tutto bene #17 By ICICI Securities
News By Tags | #420 #3518 #3062

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Exactly a year ago, we wrote ‘Andra tutto bene’ (everything is going to be alright!) in which we analysed the likely changes to consumption, industry structures etc. We revisit the thoughts, look beyond the noise, and present potential changes in operating environment and likely beneficiaries – Va tutto bene (everything’s fine!). A root-cause-analysis of every trend indicates that it’s a consumer / customer behaviour change. “Andra tutto bene #9” is here.

Key long-term trends witnessed in auto sector are: 1) Rural demand resilience amidst weakening urban ownership (2) mass-market segment (e.g. entry level 2Ws/PVs) demand recovery is stuttering while premium segment continues to steadily improve (3) Covid has led to structural acceleration of digital adoption (OEMs/dealers) for all customer outreach programmes; Covid also led to cost savings (e.g. optimisation of A&P spends) (4) strong policy measures (e.g. increase infra investments, scrappage policy) lay down strong foundation for potentially multi-year growth for commercial segments (e.g. M&HCV) (5) a well-structured PLI scheme could lead to meaningful TAM expansion for exports, localisation of new technologies (e.g. EV cells) (6) significant challenges due to supply-chain bottlenecks (e.g. semiconductor chips shortage) could lead to change in the traditional “Just-in-time” manufacturing process and (7) persistence of Covid is leading to increasing adoption of work-from-home in major cities which could result in reduced miles travelled per personal vehicle, thereby, elongating vehicle replacement cycles. As a theme, we prefer economy facing segments (e.g. CVs/Tractors) over consumer segments (e.g. 2Ws/PVs).

Beneficiaries: Tata Motors, Ashok Leyland, M&M

Potentially negatively impacted companies: Hero Motocorp

See our previous reports in the series (link) – Consumer, Agriculture, Pharma, Real Estate, Telecom, Power, Dairy, Capital Goods, Cement, BFSI, Building materials, Oil & Gas, Logistics, Defence, Diversified Financials, Metals

 

* Rural demand continues to outshine its urban counterpart: Consumer facing auto demand has witnessed yet another year of strong outperformance (e.g. economically weaker states like West Bengal, Jharkhand have outperformed stronger states like Gujarat, Karnataka Link). The growth surprise is likely to continue via rural segments due to healthy outlook for agrarian cashflow and restarting of government spending on infrastructure projects. On the urban side, Covid risk is already leading to employers turning cautious, this could hurt consumer sentiment (e.g. lower than expected salary hikes/job fears).

 

* Premium segment shining while mass-market facing headwinds: Premiumisation trends had paused immediately post Covid onset as massmarket segments benefitted from lack of public transportation leading to increased need for affordable mobility. However, over the past few quarters, premiumisation trends have started to improve across PVs/2Ws (UVs outgrowing cars; >250cc motorcycle’s outgrowing <125cc segment). OEMs are also recognising the change with a slew of new launches (e.g. 4 new SUV launched in 4Q) happening across the premium segment.

 

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