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Chip shortage impacts PV, premium 2W, and LCV…

…Ganesh Chaturthi a washout; industry pins hopes on Navratras

* PV demand remains strong and CV demand is showing good signs of recovery. Tractor demand is largely stable, while 2W demand is yet to recover. Retails during Ganesh Chaturthi were lower on a YoY basis. Sep’21 saw the start of the Shraddh period from 21st Sep’21, which would end by 6th Oct – this has affected inquiries and bookings.

* Our interactions with leading industry channel partners reflect cautious optimism for the upcoming festive season – after weak retails during Ganesh Chaturthi due to supply-side constraints for PVs and slow demand for 2Ws. There is a fear of losing out on a portion of the festive sales for PV and Royal Enfield due to supply-side issues. PV demand has sustained, while 2W demand is yet to fully recover. M&HCV demand is benefiting from the increase in construction activity, especially in the Residential Housing segment. Tractor demand remains largely stable.

Sep’21 wholesale volumes are estimated to decline 21% YoY for 2Ws, ~32% YoY for PVs, and ~12% YoY for tractors. CV wholesales are estimated to grow 26.5% YoY (LCV by 5% YoY and M&HCV by 65% YoY) and 3W by 22% YoY on a low base and the negligible impact of supply-side issues (barring LCV).

* 2W: Demand for 2Ws is improving at a sluggish pace. Customers are deferring their purchases due to the ongoing inauspicious Shraddh period. Higher fuel prices are restricting the pace of recovery, consequently driving customers’ interest in e-scooters, supported by subsidies. New launches such as RE Classic 350 and TVS Raider (125cc) have been garnering customer interest.

Semiconductor availability issues are impacting >150cc segment volumes – they are impacting RE the most as other OEMs have sailed through owing to high inventory in the system, which stands at around 45–50 days. We expect wholesales to decline 16.5% YoY for BJAUT 2Ws, 6% YoY for TVS, ~27% YoY for HMCL, and 63% YoY for RE.

* PV: Demand for PVs remains strong; however, sales are hampered by supply chain constraints, leading to high waiting periods for some of the high-selling models. Semi-conductor availability issues may start to resolve from Oct’21 with the resumption of chip manufacturing factories in Malaysia. Inquiry levels are healthy and OEMs have strong order books.

Demand for CNG vehicles remains strong, benefitting from surging fuel prices and the increased penetration of CNG in newer cities. Inventory in the system stands at around 10–20 days. Volumes are expected to decline 40% for MSIL and 31% for M&M (UVs incl. Pickups), but grow 29% for TTMT’s PV business.

* CV: There is sequential improvement in demand with increased freight availability and the resumption of infrastructure demand as the monsoon recedes. Demand from the Construction segment was further supported by an uptick in the Real Estate sector. LTV remains range-bound at 85–90%, with large operators benefiting v/s small operators. There is a significant increase in CNGpowered ICV/LCV for intra-city transportation – which accounts for 50–70% of the total ICV/LCV sales currently (v/s 20–40% last year).

Due to gaps in the CNG portfolio, AL is losing market share to TTMT and Eicher Motors, especially in the ICV segment. Inventory in the system is marginally higher than normal levels of 30 days, as some dealers are increasing their inventory due to the fear of the semi-conductor shortage sustaining in the future. We expect AL’s CV wholesales to grow 21% YoY (50% YoY for M&HCV, -2% for LCV) and TTMT’s CVs to grow 29% YoY (80% YoY for M&HCV, 10% for LCV).

* Tractors: Agricultural and commercial demand was largely stable in a seasonally weak period. Inventory in the system stands at around 30 days. We expect tractor volumes to decline 10%/17% YoY for MM/ESC.

* Valuation and view: The semiconductor shortage is expected to persist in 2HFY22. Although, supplies would improve from the lows of Sep’21, resulting in potential earnings downgrades in FY22 estimates. We prefer 4Ws over 2Ws as PVs are the least impacted segment currently and offer 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 TTMT are our top OEM picks. Among the auto component stocks, we prefer BHFC and APTY.

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