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May’21 wholesales to be impacted by COVID-led lockdown

Expect strong pent-up demand post lifting of restrictions

* In May’21, most regions were under an ensuing COVID-led lockdown. Inquiries were significantly lower than normal levels, except in Tractors. While a strong order book and ongoing preference for personal mobility would support PVs, strong demand for 2Ws seems unlikely on high inventory in the system and severe impact of the second COVID wave on rural and semi-urban markets. Wholesales are expected to decline MoM due to the impact of localized lockdowns by states and supply-side issues (including availability of industrial oxygen).

* A majority of OEMs – MSIL (1-16st May’21), TTMT’s Jamshedpur plant block closure (18-22nd May’21), HMCL (22nd Apr’21-16th May’21), MM (four days of closure in May’21), RE (27-29th May’21), and Escorts (1-3 rd May’21) – have advanced their maintenance shutdowns during Apr-May’21 to merge it with the ongoing lockdown. BJAUTO and TVSL also faced shutdowns, but the exact dates are not known.

* Our interactions with leading industry channel partners reflect optimism regarding a recovery once the lockdown is lifted. 2W demand continues to remain subdued, with dealer inventory at 30-60 days. Demand momentum in PVs is expected to resume once the lockdown is lifted as inventory levels are below normal (less than 30 days), with a waiting period of 6-8 weeks in fast selling models. Demand for M&HCVs remains strong in the Infrastructure segment (considering inquiries in the current market), while the same in the Cargo segment has slowed down. Tractor demand has largely sustained on the Agriculture side, but Commercial demand has slowed down.

* Considering the impact of COVID-19 from May’20, a YoY comparison doesn’t make sense. In May’21, 2W Wholesale volumes are estimated to decline by 37% MoM, PVs: ~69%, CVs: ~74% (LCV/M&HCVs by ~77%/~71%), 3Ws: 19%, and Tractors: ~21%.

* 2Ws:

Most 2W dealers we interacted with were shut. Some dealers transferred their stock to sub-dealers and saw very low Retails, wherever markets were open. Wholesales were also very low due to plant shutdowns. OEMs also avoided inventory stocking at the dealers end. Inquiry levels were negligible, and dealers are expecting pent-up demand in Jun’21 when the lockdown is lifted. Rural demand has also been hit this time around as savings were impacted by the second COVID wave. Inventory in the system stands at 45-75 days. We expect 2W Wholesales for BJAUT to decline by 23% MoM, TVSL by ~32% (supported by exports), and HMCL and RE by ~50%.

* PVs:

Most dealers we interacted with were shut in May’21. Inquiry levels and conversion rates are low. Customers with existing bookings are deferring their purchases to Jun’21, however cancellation of bookings are low (~10%). Momentum in new bookings has slowed down to ~70%. Dealers are receiving bookings through the online channel, but the quantum is still low as customers mostly prefer a touch and feel experience.

We expect a strong recovery once the lifting of lockdown restrictions as demand for personal mobility has been reinforced after the second COVID wave. CNG remains the preferred fuel option for entry-level customers due to rising fuel costs, benefitting MSIL. The waiting period has increased as there were shutdowns by OEMs in May’21. Dealers are holding 10-20 days of inventory. Volumes are expected to decline by ~72% MoM for MSIL, ~60% for MM, and 60% for TTMT (impacted by restricted production at its Pune plant).

* CVs:

As most CV dealerships are on highways, they are least impacted by the lockdown. However, their operations have been impacted due to human resource disruptions to staff, labor movement, finance representatives, etc., affecting 50-70% of Retail sales MoM. Demand for M&HCVs from the Infrastructure segment remains strong, however the same from the Cargo segment slowed due to the lockdown. Absence of a moratorium on term loan EMI payments from the government has pushed dealers to minimize inventory and adversely impacted the viability of transporters.

However, dealers are optimistic about a strong recovery on the back of good Infrastructure demand and expected restructuring of loans to transporters by financiers. LTV is stable at 85-90%, however the loan processing time has increased due to COVID-19. Higher tonnage segments continue to dominate due to higher demand from the Infrastructure segment. LCV and SCV demand remains low due to restrictions on e-commerce in regions under lockdown. We expect AL/TTMT’s wholesales to decline by ~80%/~77% MoM (~80% each for M&HCVs).

* Tractors:

Majority of channel partners were closed or operated for a limited amount of time. Agriculture demand remains strong, but Commercial demand has been partially impacted. Inventory in the system is ~30 days. We expect Tractor volumes to decline by ~20%/24% MoM for MM/ESC.

* Valuation and view:

Though May’21 has been impacted by the COVID-led lockdown across segments, volumes are expected to recover with the gradual lifting of lockdown restrictions. Current valuations largely factor in a sustained recovery (our base case), leaving a limited margin of safety for any negative surprises. We prefer 4Ws over 2Ws, as PVs are the least impacted segment currently and offers a stable competitive environment. We expect the CV cycle recovery to sustain and gain momentum. We prefer companies with: a) higher visibility in terms of a demand recovery, b) a strong competitive positioning, c) margin drivers, and d) balance sheet strength. MSIL and MM are our top OEM picks. Among Auto Component stocks, we prefer ENDU. TTMT is our preferred a play on global PVs.

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