Auto & auto ancillaries Sector Update - Global demand outlook muted across most segments By Emkay Global Financial Services
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Global demand outlook muted across most segments
* Global production and demand outlook across HCV, construction equipment, and tractors is subdued for CY23, based on the commentary provided by 26 global entities. Weakening outlook is negative for forging companies such as Bharat Forge. However, continuing positive outlook in PVs is encouraging for Tata Motors – JLR, SAMIL, and Suprajit Engineering.
* HCVs: Subdued volumes estimated for CY23/CY24: CY22 is expected to be positive for North America Class 8 and Europe HCVs, supported by replacement demand (pentup need to replace ageing truck fleets) and better transporter profitability. Going forward, Volvo, Daimler, Paccar, and Americas Commercial Transportation (ACT) expect CY23 to be flat or lower in both North America and Europe because of: 1) Weakening freight demand and rates (refer to Exhibits 1 and 2); 2) Higher interest rates and frail macros; and 3) Lower profitability of transporters on sluggish demand-supply dynamics and higher borrowing costs. This downturn is predicted to persist in CY24 in North America, with a 13% drop in production due to change in emission norms. In comparison, India’s MHCV segment is likely to grow strongly by 14% in CY23.
* Construction Equipment (CE): Feeble macros to impact CY23 performance: In CY22, European CE industry witnessed subdued demand due to weakening economic activity. In North America, demand was a mixed bag with oil and gas and infra segments doing well, while demand in the housing segment softened due to higher interest rates. Going forward, Volvo expects CE to grow in the range of -5% to +5% in CY23 for both North America and Europe due to lower GDP. India’s CE industry grew in double digits in H1FY23, and growth is projected to remain elevated at 15%+ for FY23.
* Tractors: Mixed bag expected: In North America, demand for smaller tractors is anticipated to be muted in the range of -5% to 0%, as they are correlated to economic activity, while larger tractors are likely to grow by up to 10% in SY23 as per John Deere. In Europe, growth is expected to be 0% to 5% in SY23. In India, M&M and Escorts expect growth in high single digits in FY23.
* Oil and Gas: Positive outlook: As per Halliburton, North America’s oil and gas segment is forecast to see a multi-year upcycle, with positive growth in CY23, led by continuing improvement in activity and tightness in equipment supply (sold out till CY23).
* Passenger Vehicles (PV): Prospects of upcycle remain post three years of weakness: Volkswagen, BMW, and S&P Global expect positive growth in CY23 for both North America and Europe, driven by pending order book and ramp-up in production on better chip supplies. S&P expects growth of 6% (earlier 9%) in North America and 7% (earlier 8%) in Europe. SMMT expects growth of 15% (earlier 18%) in CY23 and 8% in CY24 for the UK market.
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