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..Inventory inching up in PVs; new model launches to help MSIL outperform

* Our interactions with leading channel partners indicate a sustained recovery in domestic 2W demand as the retail is expected to grow 7-8% YoY, led by stable demand in urban and gradual recovery in rural markets. As expected, reduction in subsidies for e2W has resulted in 30-35% lower enquiries during the month. While we noted a 10-12% decline in enquiry level for PVs, retails are still expected to grow 2-4% YoY, led by the execution of order book and improving supply chain. Consequently, inventory level in PVs has increased to 4-5 weeks, largely for lower-end models. The retail sales of MHCVs are expected to decline by 4-6% YoY, due to the pre-buying effect before the OBD-2 transition in Mar’23. However, we have observed strong growth in the bus division, driven by demand from educational intuitions and a low base. As for tractors, although retail growth is expected to be strong (10-12% YoY) during the month, we do not expect any major impact on wholesale volumes as inventory levels are already high at 40-45 days. Overall, in June’23, wholesales for 2W/PV/3Ws are estimated to grow ~2%/5%/25% YoY, while CV/tractors are likely to decline 13%/2% YoY.

* 2Ws: Retail sales for June’23 are expected to improve 7-8% YoY, led by stable urban demand and gradual improvement in rural regions. We noted positive demand momentum in southern states such as Tamil Nadu and Karnataka, while volume growth in northern states such as UP is expected to remain flattish YoY. During the Ratha Yatra days, there was a significant increase in footfalls at 20- 22% vs the previous festive season in certain regions of Gujarat. Inquiries for escooters have declined by 30-35% post reduction in subsidies. HMCL has relaunched Passion Plus with a starting ex-showroom price of ~INR75k. As per a dealer based in the southern belt, the launch has so far helped HMCL generate incremental volume of 5-7%. On the other hand, HMSI is offering attractive finance scheme for Honda Shine, such as lower down payment of INR5-6k (vs HMCL HF Deluxe down payment of INR10-11k) in selected regions. RE Super Meteor commands a waiting period of ~4 months with customized vehicles delivered early (2-3 months). Inventory levels across most of the 2W dealers stands at a healthy 40-45 days. RE currently has an inventory level of two weeks. We expect dispatches for HMCL to remain flat YoY, while the same is expected to grow for TVSL/RE by ~7%/22% YoY. BJAUT 2W dispatches are expected to decline 4% YoY.

* PVs: Retail sales are expected to grow 2-4% YoY, primarily driven by the execution of order backlogs and the easing supply chain issues. However, supply situation has not fully recovered, and there is still a waiting period of ~2 months for most SUV models. MSIL’s new model launches Fronx and Jimny has so far received healthy traction as the cumulative order backlog is now over 55k units. Our interactions suggest initial signs of slowdown in PV demand as the inquiries have declined by 10-12% YoY. As a result, the inventory level is in the range of 4- 5 weeks (largely for lower end models). There has been a sequential increase in discounts for MSIL/TTMT by INR10-15k/unit. In contrast, discounts have remained stable for M&M. Additionally, there has been a 2-3% increase in road tax in Tamil Nadu for models priced below INR10L, which is expected to negatively impact demand for lower CC models. Post reduction in CNG prices, there has been some uptick in overall volumes. Currently, the waiting period for Ertiga CNG stands at 32 weeks. We noted that MSIL has shut down its production for a week. We expect dispatches for MSIL/MM (including pickups)/TTMT PV to grow 5%/8%/2% YoY.

* CVs: The retail sales of MHCVs are expected to decline by 4-6% YoY, due to the pre-buying effect before the OBD-2 transition in Mar’23. The underlying demand continues to remain healthy, led by growth in different industries, such as mining, coal, and infra coupled with the last mile segment. However, there has been some weakness in agri segments specially in the rural, resulting in a slight decline in the utilization levels. Freight rates have largely remained stable. We have observed strong growth in the bus division, driven by demand from educational intuitions and a low base. Discounts during the month remained stable, while the inventory level stands at 3-4 weeks. While we expect dispatches for TTMT CV/AL to decline ~20%/6% YoY, it is expected to grow by ~2% YoY for VECV.

* Tractors: Our channel checks suggest June’23 retail sales to grow 10-12% YoY with the onset of monsoon coupled with support from several state government incentives such as Chhattisgarh (40-50% subsidy on tractors/implements), MP (interest waiver scheme), Rajasthan (free implements to limited farmers), etc. in the pre-election year. Higher growth is expected in paddy growing areas, including southern states, Chhattisgarh, and West Bengal. We noted that discounts of INR25-30k/unit are being offered by M&M and TAFE for their selected models. While the retail growth is expected to be strong, we do not expect any major impact on wholesale volumes as inventory levels are already high at 40-45 days. We expect dispatches for MM to decline 3% YoY and the same is expected to remain flat for ESCORTS.

* Valuation and view: We prefer CVs over other segments, on the back of strong demand cycle over the next few quarters along with a stable competitive environment. We prefer companies with: a) higher visibility in terms of demand recovery, b) strong competitive positioning, c) encouraging margin drivers, and d) a strong balance sheet. TTMT and AL are our top OEM picks. Among auto component stocks, we prefer BHFC & MSUMI.

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