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Published on 2/07/2020 12:01:30 PM | Source: Motilal Oswal Financial Securities Ltd

Automobiles Sector Update - Demand recovery surprises market, OEMs alike By Motilal Oswal

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

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…Wholesales more reflection of production constraints than retail demand

* With the lifting of the lockdown in May, the Auto industry has seen demand recovery on the back of: 1) preferences for personal vehicles, 2) pent-up demand from bookings from the pre-COVID-19 era, and 3) high disposable incomes in the rural market. In Jun’20, most of the OEM plants were operating at 50–70% average utilization (ex-Tractors), with >90% of dealer outlets operational.

* Our interaction with leading industry channel partners indicates 2W and PV are seeing inquiries return to pre-COVID-19 levels by June end. On the other hand, CV has witnessed demand only from the Construction sector, which accounts for ~30% of total sales. Most of this demand is need-based, driven by preferences for personal vehicles, further fuelled by the absence of public transport. While overall consumer sentiment has improved, customers remain cautious in terms of spending given the uncertain environment.

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

* Demand in Tractors remains strong, with growth in retail sales in most of the markets. With production ramping up to 85–90%, supply continues to lag behind demand.

* Demand in 3W is still very low, further impacted by stringent financing norms and disinterest from financiers for being a high-risk segment.

* In Jun’20, wholesales volumes are estimated to decline ~38%/~47%/~78% YoY for 2W/PV/CV amid lockdown and low demand. Tractors volumes are expected to decrease by ~12% YoY. The plunge in wholesales is more a reflection of supply constraints in Tractors/2W/PV than retail trends.

* 2W: Demand recovery has surprised OEMs and dealers alike, largely attributed to: a) preferences witnessed for personal vehicles over the use of public transport in the current crisis and b) high disposable incomes in the rural market owing to a good harvest, and c) the absence of adequate public transport options, d) pent-up marriage season demand in the northern region. Inquiries reaching pre-COVID-19 levels have provided some comfort regarding demand sustainability. We expect wholesales to decline by 42% YoY for BJAUT (40% fall in dom. 2W), 41% YoY for TVSL, 35% for HMCL, and 40% for RE, majorly due to supply-side constraints, more specifically for in-demand models.

* PV: Recovery is being driven by necessity-based demand, with the major portion of sales coming from first-time buyers. MSIL is in a comparatively better position than peers owing to its entry-level portfolio. Volumes are expected to decline ~44% for the company. Wholesales are expected to decline ~60% YoY for M&M’s UV (incl. pick-ups) and ~44% for TTMT’s PV, weighed by supply-side constraints and the absence of discretionary demand.

 

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