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PV demand momentum sustains in Mar’22; 2Wsremain muted

CV customers turn cautious for the near term due to fuel price hikes

PV demand remained strong while CV customers turned cautious towards the end of the month led by fuel price hikes. 2W retail continued to remain under stress with hopes emanating from the upcoming marriage season and higher funds available to the consumers due to Rabi crop harvesting, according to our interactions with leading industry channel partners.

PV dealers remained upbeat on strong demand and improving supplies from OEMs. M&HCV demand has been benefiting from the rise in infrastructure activities and high capacity utilization; however, fleet operators were cautious while buying due to the recent diesel price hikes.

In Mar’22, wholesale volumes are estimated to decline 16%/36% YoY for 2Ws/ Tractors, respectively, while volumes are estimated to grow for PVs by 13% YoY as semiconductor availability improves. CV wholesale is likely to remain flat YoY (M&HCV to grow 5% YoY and LCV to decline 2% YoY) and 3Ws to grow 7% YoY.

2Ws: Demand in Mar’22 remained sluggish and failed to pick up. Recent petrol price hike, post-elections, acted as a dampener to the already weak demand. The upcoming marriage season and higher funds available to the consumers due to Rabi crop harvesting could help in reviving demand. Inventory in the system stood at 60-75 days (based on current retail figures). RE supplies continued to be affected adversely by supply-side issues leading to a waiting period on Classic 350 and Meteor. We expect wholesale figures for BJAUT 2Ws to decline ~9% YoY, TVS by ~5% YoY, HMCL by ~27% YoY and RE by ~5.5% YoY.

PVs: Supplies from the OEMs are improving sequentially. Newly launched Baleno has been garnering consumer interests and has been enjoying a high waiting period. Higher variants are preferred by consumers indicating a priority towards safety. CNG continued to remain the preferred fuel option and new launches have further enhanced the value proposition. For MSIL, CNG contributed 40% to order book in regions with CNG availability. Inventory in the system stood at 15- 20 days. Volumes are expected to remain flat for MSIL (led by exports) but to grow ~44% for M&M (UVs incl. pick-ups) and ~54% for TTMT’s PV business.

CVs: Crude oil price has started impacting retail figures adversely with some cancellation of bookings and postponement of orders. Transporters are expecting retail diesel price to increase by INR10-15/liter, narrowing the retail and wholesale price gap. Currently, operators are buying new trucks for new orders only when they have diesel price hike as pass through. Fleet utilization levels are estimated to have reached around ~80-85%; however, transporters are buying cautiously due to the ongoing uncertainty. Financing has not been a constraint but underwriting has continued to be stringent. LTV has continued to remain range bound at around 80-90% for large operators and lower for small operators. Small fleet operators have been cautious while buying trucks as they need to put their own equity due to lower LTV. AL’s dealers have been witnessing strong traction in the recently launched CNG portfolio in its ICV segment. Inventory in the channel stood at an optimal level of 20-30 days. We expect AL’s CV wholesale figures to remain flat YoY (2% YoY growth in M&HCV and 6% decline in LCV); TTMT’s CVs to grow 3% YoY (12% YoY growth for M&HCV and 5% decline for LCVs) and VECV to be flat YoY.

Tractors: Demand continued to remain muted with some recovery expected post Rabi crop harvest. Agricultural demand has been subdued (seasonal), while commercial demand has been flat. Inventory in the system stood at 25-30 days. Tractor volumes are likely to decline 32%/47% YoY for MM/ESC, respectively

3Ws: With the pandemic receding, consumers are returning to shared mobility services leading to rising 3W sales. Financing still remains a concern due to stressed income of drivers that might lead to NPAs. Several unorganized players have entered the e-rickshaw space and are taking away market share from incumbents. We expect domestic 3W volumes to grow 8%/10.5% for BJAUTO/ TVS, respectively, and decline 7% YoY for MM. Exports would grow for both BJAUT/TVSL by 13%/2% YoY, respectively.

Valuation and view: While easing semiconductor supplies boosted PV retail figures, 2W segment has been yet to recover amid high cost of ownership and CVs might see postponements in sales due to diesel price hike. We prefer 4Ws over 2Ws, backed by strong demand and a stable competitive environment. We expect the CV cycle to retain momentum. 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 AL are our top OEM picks. Among auto component stocks, we prefer BHFC and APTY. We also like TTMT as a play on the global PV cycle

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