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Supply-side issues impacting most segments

Price hikes to worsen situation of 2Ws

* The demand momentum largely sustained across segments (excluding 2W) in Mar’21. However, the recent price hike announced by OEMs to cover rising commodity prices may have had some impact on demand. Inventory is much lower than normal for PVs and Tractors due to strong demand, leaving headroom to fill inventory in the coming months. PVs and Tractor wholesales are expected to grow for replenishing abnormally low inventory.

* Our interaction with leading industry channel partners reflects optimism (excluding 2Ws). Weak 2W demand continued in Mar’21, with OEMs maintaining inventory of 30- 45 days at the dealers end. Demand momentum for PVs has sustained, resulting in below normal inventory (less than 10 days), with a waiting period of 4-6 weeks in fast selling models. M&HCV demand has grown sequentially, but not to the extent that it was expected to reach at the end of FY21, due to supply-side constraints. Demand from the Infrastructure/Construction segment remains strong, while the Cargo segment is catching up with an increase in capacity utilization. Demand for Tractors remains strong, with inventory at 10-30 days.

* Considering the impact of COVID-19 from Mar’20, a YoY comparison doesn’t make sense. In Mar’21, wholesale volumes are estimated to grow by ~3.6% MoM for 2Ws. PV and CV wholesales were restricted by supply-side constraints. PVs/CVs are expected to grow by ~6.3%/~8.8% MoM (LCV/M&HCV growth of ~10.5%/~7% MoM). Wholesale volumes for Tractors are expected to grow by ~14.3% MoM on robust demand.

* 2Ws: Slowness in demand was further impacted by fuel price inflation. We expect some recovery in demand in Apr’21 due to expected cash flow from the sale of rabi crop and beginning of the marriage season. OEMs – BJAUT (CT100, CT110, and Platina – INR2.5k) and HMCL (INR1k) – are offering discounts to push sales. Dealers are holding 1-1.5 months of inventory. The waiting period for RE’s Meteor is 12-16 weeks, while Classic/Bullet is readily available. We expect sequentially flat wholesales for BJAUT 2Ws (8.4% MoM growth in domestic 2Ws), ~5.8% MoM growth for TVSL, ~4.5% for HMCL, and ~2% for RE.

* PVs: Strong demand for PVs sustained in Mar’21. The waiting period is still high across OEMs. TTMT is benefiting from its existing range of vehicles (Nexon and Altroz). Customers prefer CNG models over petrol given its lower running cost, with MSIL benefitting from the same. Volumes are expected to grow by ~4.3%/~22.8%/8% MoM for MSIL/MM/TTMT.

* CVs: Demand for M&HCVs from the Infrastructure segment remains strong, even as the Cargo segment is catching up. Discounts have fallen by 4-5% to 10-13% from Dec’20 levels due to improving demand and supply-side issues. M&HCVs now have a waiting period of 30 days due to supply-side constraints (for most parts including semiconductors), which was not there two months back. LTV is stable (85-90%), leading to an increase in inquiries and conversions. Post lifting of the moratorium on term loan EMIs, there has been exit of some transporters, but this has led to the entry of new ones, indicating demand. Higher tonnage segments continue to dominate due to higher demand from the Infrastructure segment. Demand for LCVs/SCVs continue to remain strong. We expect AL’s wholesales to grow by ~6.8% MoM (~8% MoM for M&HCVs) and that for TTMT to grow by ~6% MoM for both M&HCVs and LCVs.

* Tractors: Demand for Tractors has sustained due to good rabi sowing and preference for farm mechanization. Both MM and ESC are operating at full capacity. Sales remain skewed towards greater HP Tractors due to higher demand from the Agriculture segment and low base. Commercial use of Tractors is also picking up. Dealers are also holding lower inventory (10-30 days). We expect Tractor volumes to grow by ~16%/9% MoM for MM/ESC due to higher demand.

* Valuation and view: Mar’21 saw sustained demand across segments (excluding 2Ws). Current valuations largely factor in sustained recovery (our Base case), leaving a limited margin of safety for any negative surprises. 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. We prefer TTMT as a play on global PVs.

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