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Nov’22: Demand momentum continues post festive season…

…inventory correction in 2Ws/tractors; PVs/CVs remain stable

Dispatches for PVs and CVs for November were in line, while 2Ws were below estimates. On the other hand, tractors were above estimates. Miss in 2Ws was largely attributed to weak exports and inventory correction post festive season. Easing of chip shortages, coupled with healthy demand sentiments, is driving PV volumes. Despite inventory correction, tractor wholesales grew 11% YoY. We expect tractor demand outlook for H2FY23 to remain positive, led by a healthy rabi season outlook, though the high base of 4Q will taper growth. PV/tractors/3W volumes grew 26%/11%/8% YoY, respectively, while 2Ws remained flat YoY. In CVs, M&HCV grew 25% YoY, but LCV declined 14%.

* 2Ws – Below estimates, flat YoY: Post the festive season, domestic dispatches were largely muted for OEMs. Export dispatches continue to decline YoY but improvement is visible in some markets as highlighted by OEMs. In 2Ws, sales of HMCL was above estimates with 12% YoY growth (to 390.9k units). TVSL (below estimates) was flat YoY to 277.1k units as domestic 2W grew 9% but exports declined 12%. BJAUT declined 19% YoY due to a 28% decline in 2W exports and a 15% decline in domestic 2Ws. RE wholesales were below estimates at 70.8k units. BJAUT’s management indicated that 60% of its exports continues to remain soft mainly in Africa. As indicated by the management, exports outlook is dependent on USD movements. RE has posted its lowest export wholesales in FY23YTD in Nov’22 at 5k units, a decline of 27% YoY (v/s 1HFY23 avg of ~9k units).

* PVs – In line, grew 26% YoY: Wholesales in Nov’22 grew 26% YoY on the back of easing chip supplies and stable demand. Consequently, volumes for MSIL/TTMT PVs/MM UVs (incl. pickups) grew 14%/55%/41% YoY to 159k/46.4k/52.35k units, respectively. A strong order backlog and continued traction on new model launches should help sustain momentum going forward.

* CVs – In line, flat YoY: Nov’22 M&HCV volumes were in line with 25% YoY growth, while LCV volumes were below estimates with a 14% YoY decline. AL continues to recover its market share as reflected in substantial outperformance v/s peers (up 39% YoY to 14.6k units, TTMT declined 10% YoY to 29.05k, and VECV grew 20% YoY to 4.9k units).

* Tractors – Above estimates, grew 11% YoY: Post festival inventory correction resulted in a sequential decline in volumes for Nov-22. However, overall volumes grew YoY as ESC/MM reported 12%/10% YoY growth to 8k/30.5k units. As per MM, outlook for the upcoming rabi season is positive, led by brisk sowing of rabi crops, higher moisture content in the soil, and healthy reservoir levels. This is expected to break past year records of sowing 70m hectares. Procurement of Kharif crop has progressed well, bringing liquidity to the hands of farmers, and this augurs very well for tractor industry’s growth.

Valuation and view: While easing semiconductor supplies boost PV retails, CV demand momentum is quite stable. We prefer 4Ws over 2Ws, on the back of strong demand and offer a stable competitive environment. We expect CV cycle to maintain its momentum. We prefer companies with: a) higher visibility in terms of demand recovery, b) a strong competitive positioning, c) encouraging margin drivers, and d) a strong balance sheet. MSIL and AL are our top OEM picks. Among auto component stocks, we prefer BHFC and APTY. We also like MOTHERSO as a proxy on easing global supplies.

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