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Initial recovery witnessed in Jun’21 sustains in Jul’21

Government employee wage revisions push PV sales; e-2W inquiries rise

* July is a seasonally slow month, and the current demand situation represents initial signs of recovery. While there is negative sentiment due to the fear of a third COVID wave, this seems to have had a higher impact on 2W than PV. Inquiry levels for PVs have improved and are expected to convert to bookings once the inauspicious period is behind. 2W is still a laggard. Tractor demand has seen seasonal decline. CV recovery has also been slower.

* Our interaction with leading industry channel partners reflects mixed sentiments of optimism and uncertainty surrounding the noise of the third COVID wave. PV demand was boosted by wage revisions for government employees, while 2W demand recovery was very slow. M&HCV demand is expected to recover towards the end of 2QFY22 – as the Infrastructure segment is seasonally slow due to the monsoons and cargo is impacted by low freight availability. Tractor demand has also eased due to seasonality, and commercial demand is picking up gradually.

* In Jul’21, 2W wholesale volumes are estimated to reach Jul’19 levels (+14% YoY), CVs would decline marginally by ~2% on a two-year CAGR (v/s +90% YoY). LCV would come in flat on a two-year CAGR (+52.5% YoY), while M&HCV would post a ~6% CAGR decline (+182% YoY). PV (+19% CAGR; +47% YoY) and Tractor (+28% CAGR; +32% YoY) are the only segments to report higher volumes v/s Jul’19 levels.

* 2W: Demand recovery is very slow, attributable to (a) rising fuel prices, (b) the impact of the second COVID wave in 2W markets, and (c) the fear of a third wave, to some extent. e-Scooters (TVS iQube, Bajaj Chetak) are slowly receiving inquiries after incentives were offered by the government through various EV policies. Inventory in the system stands at around 45–60 days. We expect wholesales for BJAUT’s 2W to post a 1.5% two-year CAGR (v/s +39% YoY), TVS to post a ~2% CAGR (+14% YoY; both supported by exports), HMCL to post a ~2% CAGR decline (flat YoY), and RE to remain flat v/s Jul’19 (+35% YoY).

* PV: The strong demand momentum has continued. Inquiry levels are healthy and up by ~10% over Jul’19 levels, while bookings are flat. Salary increases for government employees have also created PV demand, leading to higher retail. With the surge in fuel prices and increased penetration of CNG in newer cities, demand for CNG-run vehicles has increased, benefitting MSIL. The Bolero Neo, recently launched by MM, has created quite the buzz and may take away some of the sales of the old Bolero and XUV300 models. All OEMs have a waiting period of one to four months. Inventory in the system is around 10–20 days. MSIL/TTMT’s PV is expected to post a ~21%/56.5% two-year volume CAGR (+47%/74% YoY), while MM’s UV would see a ~2% two–year CAGR decline (+30% YoY).

* CV: Currently, sales to individual truckers and small fleet owners are near zero; even large fleet operators are struggling due to low freight availability. Dealers are expecting demand recovery towards the end of 2QFY22. Infrastructure demand is slow due to the monsoons, while cargo demand is still very low. LTV is stable at 85–90% as financiers are quite aggressive in funding any demand (but only from large fleet operators) due to their experience of the first wave. Ecommerce activity has continued to support LCV demand. Inventory in the system is at a marginally higher normal level of 30 days. We expect AL’s wholesales to post a ~6.5% two-year CAGR decline (+100% YoY; -14% CAGR; +190% YoY for M&HCV). We estimate TTMT’s CV wholesales to remain flat v/s Jul’19 (+101% YoY; similar for both M&HCV and LCV).

* Tractor: YoY growth in Tractor wholesales would largely be on a low base as Jul’20 sales were impacted by supply-side issues. July is a seasonally slow month for agricultural demand, and commercial demand is picking up gradually. The inventory in the system is around 30 days. We expect MM/ESC’s Tractor to post a ~26%/34% two-year volume CAGR (25%/64% YoY).

* Valuation and view: Demand momentum is building up gradually post the reopening in Jun’21, with varied recovery visible across segments. Current valuations largely factor in sustained recovery (our base case), leaving a limited margin for safety for any unexpected disappointments. We prefer 4W over 2W as PV is the least impacted segment currently and offers a stable competitive environment. We expect the CV cycle to recover and gain momentum towards 2HFY22. 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 MM are our top OEM picks. Among the auto component stocks, we prefer BHFC and ENDU. We prefer TTMT as a play on global PV.

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