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Demand for PV/CV better, while 2W turns weak

…Rural demand turning positive but benefits not yet visible in 2Ws

* Our interaction with leading industry channel partners indicates positive demand sentiments for PV, CV and tractors. However, after two to three months of healthy recovery, 2W demand has again turned weak in Dec’22. PV demand has largely remained unaffected as order backlog across OEMs have sustained. However, we noted a sharp increase in discount schemes/benefits (three-four years high) of up to INR65-75k/unit across OEMs, but largely for lower end models. CV sentiments have again started to improve, led by improved fleet utilization levels at 78-80%, increase in freight rates by 1.5-2%, and high discounts. In tractors, while Agri sentiments have been positive, its benefits will not get reflected in Dec’22 wholesale due to lower scope of inventory push across OEMs and the beginning of an inauspicious season (Kharmas). Despite this, we expect 6-8% YoY growth in tractor retail during the month. In Dec’22, wholesale volumes are estimated to grow 8%/14% YoY for PVs/tractors, while it is expected to decline 7%/4%/2% for 2W/CV/3Ws.

* 2Ws: After a healthy recovery over the last two to three months, 2W demand momentum has slowed down again, resulting in an expected decline of 5-7% YoY for retail volume in Dec’22. While the rural sentiments are turning positive, it is not yet benefitting 2W demand, especially in the lower-end segment. Due to lower retails, inventory level for HMCL has increased to seven to eight weeks (v/s six to seven weeks till last month). Inventory has largely remained stable at four to five weeks for other players. OEM discounts are largely muted, except for some exchange benefits of up to INR2k/unit and discounts by dealers of up to INR1.5k/unit, varying across regions. We noted that HMCL took a price hike of INR900-1,500/unit in Dec’22. RE Hunter continues to see healthy demand as waiting remains intact at 1-1.5 months, while Classic 350 too is witnessing healthy demand. Waiting period for other models is < two weeks depending on the color and specs. We expect wholesales for BJAUT 2Ws to decline ~21% YoY (domestic 2W decline of 9% YoY) and HMCL/RE to decline 5%/6% YoY, respectively. TVS 2W volumes are expected to grow 7% YoY (domestic 2W growth of 23%).

* PVs: We expect PV retails to grow 9-11% YoY in Dec’22, led by healthy order backlog and high discounting. However, routine maintenance shutdown in MSIL and marginal increase in supply-side challenges adversely impacted dispatches for Dec’22. Our check suggests that order backlog for MSIL stands at >340k units, out of which, Grand Vitara accounts for 15-17% of the bookings. Both the new launches - Grand Vitara (seven-eight months waiting) and Brezza (five to six months waiting) are witnessing healthy traction. For M&M, especially in the high-end segment, the waiting period for new launches such as XUV700 (up to 12 months), Scorpio N (up to 8 months) and Scorpio Classic (up to 6 months) are high; however, cancellation rate too stands at 17-18%. In TTMT, the waiting period for Nexon stands at three to four months. Despite high order backlog, discount schemes/benefits are as high as INR65-75k/units (three to four year high) across all OEMs. Average inventory is ~30 days for PV OEMs. We expect MSIL volumes to decline 5% YoY, while for TTMT/MM (UVs incl pickups), it is expected to grow 28%/43% YoY.

* CVs: We noted recovery in demand sentiments, led by sequential growth in fleet utilization level to 78-80%, increase in freight rates by 1.5-2%, and increasing discounts. Hence, we expect 12-14% YoY growth in retail volumes during the month. This has helped transporters to offset the impact of rising interest cost to some extent. While the demand is majorly driven by large fleet operators, there has been a gradual pickup in demand from small fleet operators as well. However, we are yet to see a broad-based recovery in both the customer segments, especially through new fleet additions. We noted the increase in discounts to 9-10%, with AL offering higher discounts than its key peers with an aim to improve its market share. The shift from CNG to diesel continues due to the rising CNG prices as our feedback suggests ratio of CNG within ICV is now less than 40% vs over 60%, a year back, in key regions. Channel inventory currently stands at over 30 days (stable MoM). We expect dispatches for AL to grow ~20% YoY, while the same should decline 11%/13% for TTMT/VECV.

* Tractors: Agri sentiments across regions remain positive, led by healthy reservoir levels, better crop yield, and favorable financing. However, these benefits do not fully reflect in Dec’22 wholesale due to lower scope of inventory push across OEMs and the beginning of inauspicious season (Kharmas). Despite that, we expect 6-8% YoY growth in retail during the month. Inventory level largely remains stable at 33-35 days across key OEMs. Moreover, financing situation seems positive as LTV is now 90-95% in some of the geographies. Discounts have come off further this month to INR20-30k but varies across regions. As per our interaction with one of the dealers, effective tractor prices have increased an average of ~INR20k/unit led by i) price hike of ~INR15k/unit in mid Nov, ii) discounts coming off by ~INR5k/unit in Dec’22. We expect volume for MM and ESC to grow 12%/23% YoY, respectively.

* Valuation and view: We prefer 4Ws over 2Ws, on the back of strong order book, traction for new model launches and a stable competitive environment. We expect CV cycle to maintain its momentum led by healthy fleet utilization level at 78-80%, strong demand in underlying industries and better supply chain situation. We prefer companies with: a) higher visibility in terms of demand recovery, b) a strong competitive positioning, c) encouraging margin drivers, and d) a strong balance sheet. MSIL and AL are our top OEM picks. Among auto component stocks, we prefer MOTHERSO & BHFC.

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