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Sequential decline across segments; strong rural sentiments drive tractor demand

n Apr’22, all major OEMs have witnessed ‘April Phenomena’ where April sales are generally lower than March year-end sales push. PV OEMs' volumes remained impacted by semiconductor shortage. MSIL reported decline in wholesales (-9%MoM, -10%YoY) volumes in domestic PV. However, underlying demand remains strong along with high outstanding bookings and lean inventory. In case of 2Ws, increased cost of acquisition, higher fuel prices, semiconductor shortages and muted demand trends continue to affect the sales volumes. 2W export demand remained relatively steady. Near-term 2W domestic demand is contingent on improvement in rural sentiment led by realisation of Rabi crop and marriage-related sales. In the CV segment, MHCV recovery witnessed a pause with double-digit MoM decline as rise in fuel prices has affected fleet operators’ sentiments. Domestic Tractor volumes witnessed strong double-digit YoY growth on a fairly reasonable base. Tractor demand is likely to be supported by good rabi harvest/kharif sowing and normal monsoon forecast.

2W demand is expected to pick up in coming months driven by encouraging farm sentiments and marriage season. In PV segment, wholesales in nearterm are likely to be a function of normalisation of chip supply as the underlying demand remains robust. Sequential increase in freight rates since Jul’21 has supported the profitability of CV operators. Large fleet operators have entered the market, while retail purchases are yet to take off. We expect CV volumes to be supported by demand from infrastructure and construction sectors.

PVs – chip shortage continue to affect supplies; demand remains robust: PV volumes continue to remain impacted by semiconductor shortage. MSIL reported domestic PV wholesales of c.122k units (-10% YoY, -9% MoM). PV Exports were steady with MSIL reporting monthly sales of c.18.5k units (+7%YoY, -31%MoM). TTMT and M&M reported total PV sales of c.42k units (+66%YoY, -2% MoM) and c.23k units (+23%YoY, -18% MoM), respectively. Hyundai domestic PV sales stood at 44k units (-10% YoY, -1% MoM) and Kia/MG decline by 16%/57% MoM owing to the supply challenges. EV sales for TTMT stood at 2.3k units (3x YoY, -31% MoM). MSIL has highlighted that supply side challenges will continue in 1QFY23 and it expects rural demand to improve going forward on the back of three continuous normal monsoon and record kharif crop. MG management highlighted that production volumes continue to be impacted by global suuply chain constraints and Covid-19 lockdown in different parts of the world.

2Ws – domestic wholesales remain weak; exports stay buoyant: Domestic 2W sales continued to be weak owing to muted demand environment, high fuel prices and increasing acquisition cost of vehicle. In the domestic 2W segment, HMCL/TVSL/RE registered improvement of 16%/37%/10%YoY on a low base (covid-impacted base) while BJAUT registered a decline of 26%YoY owing to semi-conductor shortages. Domestic 2W volumes, however, witnessed sequential decline across OEMs. In case of 2W exports, volumes continued to remain steady with BJAUT/TVSL reporting growth of 26%/4% MoM while HMCL/RE reported a decline of 41%/10% MoM. HMCL expects gradual recovery in economic activities to support its sales momentum in FY23. Bajaj Auto’s management indicated improvement in supplies of semiconductor and expects volumes to increase from May’22 onwards. Management highlighted that channel inventory remains low. E-2Ws continued to gain market share with increasing penetration in Tier 1 and Tier 2 cities along with metro cities. Momentum in the coming months would be contingent upon a) improvement in rural sentiment and b) response to new EV launches. Despite near term headwinds, we expect OEMs with higher export exposure to be relatively better placed to navigate the slowdown in the domestic market, enabling them to outperform their peers.

MHCV/Bus/LCV posts sequential decline: CV segment was on a path to recovery since last few months. However, sequential recovery in MHCV volumes paused during April with double-digit MoM decline. Demand for CVs witnessed a double-digit sequential decline in Apr’22 led by cautious fleet operators’ sentiment on account of RussiaUkraine issue and rising fuel prices. Total CV volume for AL / TTMT / MM / VECV declined 40%/33%/12%/40% MoM even as it increased by 41%/109%/23%/206% YoY on account of covid-affected base. In the MHCV segment, AL / TTMT / MM / VECV reported volume decline of 44%/41%/15%/38% MoM. Volume trend was similar in case of LCV and Bus segment. Overall, we expect CV sales to improve going forward driven by a) improving fleet operator’s profitability on gradual hikes in freight rates, b) reduction in working capital finance cost, c) increasing demand for CNG vehicles.

Tractors – sequential recovery in demand supported by strong rural sentiment: Tractor volumes registered strong double-digit growth YoY on a reasonable base driven by a) improved Rabi harvesting and higher crop realization nad b) positive sentiments on account of normal monsoon forecast. M&M domestic sales stood at c.39.5k units (+51% YoY, +40%MoM) while Escorts reported domestic sales of c.7.7k units (+20% YoY, -19%MoM). M&M reported export growth of 10%YoY while Escorts reported growth of 9%YoY. M&M management highlighted that rural sentiments continue to remain positive supported by a) higher prices of wheat and oilseeds in the export market amid the current geo-political environment and b) expectations on normal monsoon. Escorts management indicated that it expects strong retail sales in the next two months driven by strong cash flows in the hands of farmers. Above factors are expected to drive tractor demand in the near-term.

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