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PV wholesales impacted by semiconductor shortage

e-2W continues to see higher inquiries; Tractor demand softens

* Aug’21 demand reflects initial signs of recovery in the trailing segments (2W and CV). While PV remains strong, Tractor demand has seen seasonal softening.

* Our interaction with leading industry channel partners reflects optimism around the upcoming festive season. PV demand has sustained, while 2W demand has shown some signs of recovery, though there is a healthy level of inquiries for escooters. M&HCV demand has shown initial signs of recovery. Agricultural demand in the Tractor segment has slowed due to seasonality, while commercial demand is picking up slowly.

* Aug’21 2W wholesale volumes are estimated to decline 2.9% YoY and Tractor 7% YoY. On the other hand, PV is estimated to grow 10.6% YoY, CV by 60% YoY (LCV by 29% YoY and M&HCVs by 129% YoY), and 3W by 30% YoY.

* 2W: 2W showed some signs of demand recovery on an MoM basis. Higher fuel prices are restricting the pace of recovery, consequently driving customers’ interest in e-scooters. This is supported by the excitement around new products as well as subsidies offered through various EV policies. Inventory in the system stands at around 45–60 days. We expect wholesales for BJAUT 2W to grow 2.5% YoY and for TVS by 6.4%YoY. HMCL would decline ~10% YoY and RE by 5% YoY. The semiconductor shortage is impacting >150cc segment volumes.

* PV: PV has continued its strong demand momentum post the lifting of the lockdown. However, supplies were impacted by a semiconductor shortage, with supplies expected to get tighter in Sep’21. Inquiry levels are healthy, and OEMs have a strong order book. The recently launched XUV700 by M&M has created quite a buzz. Demand for CNG vehicles remains strong, benefitting from surging fuel prices and the increased penetration of CNG in newer cities. Inventory in the system is around 10–20 days. Volumes are expected to grow 2%/35%/30% YoY for MSIL/TTMT/MM’s PV segment.

* CV: Demand has started showing initial signs of recovery with increasing freight availability. Infrastructure demand is returning as the monsoons have weakened. LTV is stable at 85–90% as financiers are fairly aggressive in funding any demand from large fleet operators, but are very stringent in funding small fleet operators. E-commerce activity continues to support LCV demand. Inventory in the system is moderately higher than normal levels of 30 days. We expect AL’s wholesales to grow 72% YoY (90% YoY for M&HCV) and that for TTMT’s CV to grow 57% YoY (165% YoY for M&HCV).

* Tractor: Tractor agricultural demand has slowed MoM due to the seasonality effect. However, commercial demand is picking up slowly. Inventory in the system is around 30 days. We expect Tractor volumes for MM/ESC to decline 5%/14%YoY as inventory has been higher v/s last year.

* Valuation and view: Aug’21 felt the heat of the semiconductor shortage, which is expected to worsen next month. Current valuations largely factor in sustained recovery (our base case), leaving a limited margin for safety from any negative surprises. 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 APTY. We prefer TTMT as a play on global PVs.

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