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Quarterly update and outlook from global OEMs

This is the 9th note in our global auto series covering quarterly commentary from 21 global automotive companies. During 2QCY21, despite supply chain constraint, most global OEMs reported high-single digit QoQ increase in volume as they were able to adequately manage semiconductor inventory. OEMs also reported strong EBIT margin owing to better pricing and mix leading to upward revision in full year CY21 margin guidance.

Semiconductor shortage has worsened in 3QCY21 owing to Covid disruption in SE Asian countries like Malaysia and Vietnam which are backends for chips testing and packaging. OEMs such as Toyota, VW, GM and Ford have announced production cuts in Aug-Sep. Though the shortage is expected to ease in 4QCY21, we expect recovery of lost production only during CY22. Tractor OEMs remain optimistic supported by favourable farm economics.

Automakers are maintaining a positive mid-term outlook, focusing on cost reduction initiatives and the move to electrification. We expect revenue/margins of Indian auto/component companies with higher global exposure like TTMT and MSS to be adversely impacted during 2QFY22, while companies like BHFC and SONACOMS are expected to minimize the impact owing to the strong support from industrial segment and new order wins, respectively.

* Strong performance by global OEMs in 1HCY21:

In 2QCY21, despite supply chain disruptions, most of the global OEMs witnessed high-single digit QoQ growth in deliveries as the OEMs were able to adequately manage semiconductor inventory to cater to the robust demand. High YoY volume growth was driven by low base owing to Covid-led disruption. Along with robust volumes, EBIT margin performance was also strong (better than street estimates in most cases) driven by better pricing and mix.

In the CV segment, global OEMs highlighted that demand in Europe and North America remains strong owing to lack of transport capacity, high fleet utilisation leading to low inventories. Orders in CV exceed production capacity for 2021 and deliveries will be a function of chip availability. In the tractor segment, demand is robust driven by higher demand for grains, favourable farm economics and highest average age of fleets.

* Semiconductor shortage continues in 3QCY21, recovery of lost volumes uncertain during 2HCY21:

Earlier, global OEMs were expecting that semiconductor supply constraints would ease during 3QCY21. However, increasing Covid infections in SE Asia, especially Malaysia and Vietnam which are back-end chip testing and packaging regions, has further intensified the supply shortage of chips. Driven by the new development, in the past week few global OEMs have scaled back production guidance in coming months – Toyota (40% cut in Sep’21 planned production), VW (will restart Wolfsburg plant with a single shift as it resumes following the traditional summer break) , GM (few plants to go idle) and Ford (Kansas and Cologne plant to temporarily suspend output). Most of the OEMs are optimistic about the situation stabilising in 4QCY21, but recovery of lost volume in 9MCY21 remains unlikely in 4Q.

* Supply disruption and commodity inflation impact margins:

Just like the Indian auto OEMs, global players too are witnessing margin pressure from increasing commodity prices (especially precious metals and steel). The companies are mitigating the impact through price hikes, product mix and other cost rationalization initiatives. Driven by supply disruptions and commodity pressures, margins are likely to be lower in 2H vs. 1H. However, owing to strong performance in 1HCY21, most of the global PV OEMs have raised CY21 EBIT margin guidance in the current quarter. Lack of chip availability, and logistics delays remain key risks to all segments.

* As expected, TTMT and MSS to witness impact in 2QFY22; minimal impact expected on BHFC and SONACOMS:

Impact of chip shortage has been more severe in case of JLR vs. global peers as the company’s production continues to be impacted by 50% in 2QFY22. Margin of MSS was also adversely impacted in 1QFY22 driven by semiconductor shortage and supply chain constraints leading to irregular production stoppages by global OEMs. We expect the muted performance at both JLR and MSS to continue in 2QFY22. We expect the impact on BHFC to be minimal as the company draws strong support from industrial segment while Sona Comstar performance is likely to be supported by new order wins.

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