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Muted performance in PV; chip shortage and price hikes- a concern

In Sep’21, PV OEMs' volumes were adversely impacted by semiconductor shortage. MSIL/MM reported 39%/18% MoM decline in domestic PV volume. However, underlying demand remains strong along with high outstanding bookings and lean inventory. In case of 2Ws, channel filling in MC and continued recovery in scooters supported volumes. Strong MoM increase in 2W sales augurs well for 3QFY22 demand. CV segment continued its recovery post easing of regional lockdown.

CV volume is still 15%/45% below Mar'21 level. However, increasing diesel consumption and freight rates indicate further improvement during 3QFY22. Domestic tractor volume increased sequentially driven by strong recovery in rainfall in September. Tractor demand is likely to be supported by healthy agripricing, good kharif harvest, and continued strong Government support to all agri activities. Our checks suggest that 2W wholesales are likely to continue their recovery in 3QFY22 supported by dealers adding inventories and pick-up in demand during festive season.

In PV segment, wholesales in near-term are likely to be a function of normalisation of chip supply as the underlying demand remains robust. CV segment may take a little longer to recover as transporters wait for normalisation in economic activity. While wholesales are expected to improve, it is crucial to monitor sustainability of retail sales in the wake of impending price hikes.

PV wholesales impacted by widespread chip shortage; demand remains robust:

Recovery in PV volume post second Covid wave continues to be adversely impacted by shortage in semiconductor supply. Our checks suggest that underlying demand remains strong and supply constraints has led to high pending bookings and low channel inventory. MSIL reported domestic PV wholesales of c.63k units (-57% YoY, -39% MoM). PV sales have declined sequentially for all OEMs due to the chip shortage.

Hyundai domestic PV sales declined to 33k units (-34% YoY, -29% MoM) and TTMT/M&M reported sequential decline of 8%/18%. We expect the demand momentum in PVs to continue driven by focus on new launches, need for personal mobility, strong order book and pent up demand. MSIL has highlighted that owing to the semiconductor shortage, October production is expected at 60% of normal. Impact of the gradual price hike on the purchasing power and semiconductor shortage is a key monitorable.

2Ws – MC & scooters recovering; exports stay buoyant:

2W sales were supported by channel filling by dealers, while exports continued to remain upbeat. TVSL/HMCL registered the highest MoM increase in total 2W sales of 21%/17%, followed by BJAUT (+7%). RE wholesales declined 27% owing to deep-rooted supply chain constraint (lockdown in source markets). Domestic MC sales increased 24%/10% MoM for TVSL/BJAUT. Scooter sales stayed buoyant and increased 20%/23% MoM for TVSL/HMCL. 2W exports are up 4%/9% MoM for BJAUT/HMCL, while TVSL exports declined 6% MoM.

Total 2W volumes remain well below the high base of last year, with only TVSL outperforming by 6% YoY. Our channel checks suggest that dealers expect the demand to revive around the festive season starting Oct’21. However, BS6/commodity-related price hikes and high petrol prices are leading to stress on demand. Momentum in 2H would be contingent upon a) consumer sentiment during festival season and b) response to new EV launches.

CV – sequential recovery continues:

CV segment was on a path to recovery during 2HFY21. However, 2nd round of lockdown during Apr/May put a temporary pause on the recovery. Since Jun’21, CV segment has once again started on a recovery course. Total CV volume increased 5%/16%/35% MoM for AL/TTMT/VECV. MM CV volume increased 7% MoM from the depressed level of Aug'21 (50% drop in volume). Overall CV volume is still 15-45% below Mar’21 levels.

Domestic MHCV truck wholesales increased 73% YoY (on low base). AL/TTMT/MM volumes increased 13%/47%/34% MoM. LCV volumes were mixed with TTMT volume remaining flat MoM, AL volume declining 4% MoM, and VECV/MM volume increasing 32%/5% MoM. As per IFTRT, truck rentals witnessed 4-6% increase in July. Going ahead, we expect CV sales to further improve during 3QFY22. Bus segment has begun a recovery in September with total volumes improving to 50% of the normal level.

Tractors – recovery in rainfall supports volumes:

Tractor volumes increased sequentially driven by strong revival in rainfall during September recovering the deficit in CY21 rainfall. M&M domestic sales witnessed a growth of 95% MoM (-8% YoY) to c.39,000 units. Escorts domestic sales stood at c.7,975 units (-30% YoY, 62% MoM). Total tractor sales for M&M/Escorts declined 7%/26% YoY owing to high base last year. Escorts has highlighted that above normal rainfall in September has delayed harvesting in few regions of the country resulting in 2-4 weeks delay in the onset of festive season demand.

Support in MSP prices, good kharif harvest, strong rabi sowing, and continued strong Government support to all agri activities is likely to aid tractor sales in the coming months. M&M management expects tractor industry to increase at low single-digit during FY22. We expect the tractor volume growth during Oct'21-Mar'22 will continue to be impacted by high base last year.

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