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Published on 1/08/2020 10:58:04 AM | Source: Motilal Oswal Financial Services Ltd

Automobiles Sector - July highlights fine balancing act by OEMs By Motilal Oswal

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

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July highlights fine balancing act by OEMs…

…between inventory replenishment and handling supply constraints

* Demand recovery is seen in July even as OEMs continue to struggle with supply chain constraints. New sporadic lockdowns observed across geographies have adversely affected the supply chain and constrained operational dealerships (80–90% in July v/s >90% in June). The demand recovery is attributable to an increasing preference for personal vehicles and high disposable incomes in the rural market. In July, most of the OEM plants have been operating at 60–80% utilization.

* Our interaction with leading industry channel partners indicates 2W and PV are seeing a demand shift from aspirational to need-based demand. The majority of entry-level PV customers and urban 2W customers are buying vehicles for safety purposes, who otherwise may have avoided the purchase. Inquiries have reached pre-COVID-19 levels and the sales conversion duration for PV has reduced by over 50% (~20days to <10days). CVs witness demand only from the Infrastructure/Construction sector, which accounts for ~30% of total sales. While overall consumer sentiment has improved, urban customers are still cautious given the uncertain environment.

* Wholesales are expected to decline in July for all OEMs due to supply constraints at the OEM level. However, as markets open, demand recovery in 2W and PV remains skewed toward the semi-urban and rural markets. Conversely, CV is seeing minimal demand due to excess capacity, low economic activity, and financiers turning cautious as many fleet operators have already opted for moratorium.

* Demand in the Tractor segment remains strong, with growth in retail sales in most of the markets. With production constrained at 50–60% (85–90% in June) due to supply chain issues, supply continues to lag behind demand.

* Demand in 3W is still very low, further affected by stringent financing norms and a low business environment for owners/operators.

* In Jul’20, wholesale volumes are estimated to decline ~7%/~18%/~66% YoY for 2W/PV/CV (ex-Tata) due to supply constraints and low demand. Tractor volumes, despite supply issues, are expected to grow by ~13% YoY on a low base. Decline in wholesales is more a reflection of supply constraints in 2W/PV/Tractor than a reflection of retail trends.

* 2W: July demand was encouraging as June demand recovery was largely driven by: 1) a preference for personal vehicles over public transport in the current crisis and 2) high disposable incomes in the rural markets owing to a good harvest, and 3) the absence of adequate public transport options. Inquiries and bookings reaching pre-COVID-19 levels provide some comfort over the sustainability of demand. We expect wholesales to decline by 16% YoY for BJAUT (19.4% drop in dom. 2W), 15% YoY for TVSL, and 23% for RE, and come in flat for HMCL, majorly due to supply-side constraints and, more specifically, for the models in demand.

 

* PV: Demand is driven by social distancing norms, with the segment seeing a higher share of first-time buyers. MSIL is in a comparatively better position than peers due to its entry-level portfolio. Volumes are expected to decline ~12% for MSIL (on a low base) and ~37.5% for M&M’s UV (incl. Pick-ups).

 

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