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BS6 Phase-2 norms likely to keep wholesales under check

Expect YoY growth across PV/CV/tractors while 2Ws to remain flat

* Our interactions with leading industry channel partners indicate YoY growth for PVs, CVs and tractors while 2Ws to remain flat. While the first half of Jan’23 was dull due to the inauspicious period, which ended on 15th Jan (Kharmas), demand picked-up in the second half. However, disparity is expected between wholesale and retail volumes as OEMs prepare for transition to BS6 Phase-2 norms (from Apr’23). For Jan’23, PV retails are expected to grow 14-16% YoY driven by improving supply chain, traction in new launches and healthy order book across OEMs. CV retails are likely to grow 10-12% YoY despite moderating discounts, indicating strong demand in underlying industries. 2Ws demand sentiment has largely remained stable; however, our channel checks suggest 1- 3% YoY growth largely driven by marriage season demand (especially in key northern and eastern regions). In tractors, the growth is likely to be restricted to 2-4% YoY despite healthy agri sentiments. This is led by anticipation of delayed harvesting as the sowing happened late this season due to delayed monsoon. Overall, wholesale volumes are estimated to grow 8%/6%/0.4%/11%/9% YoY for PV/CV/2W/tractor/3Ws, respectively, in Jan’23.

* 2Ws: Demand sentiments have largely remained stable; however, our channel checks suggest 1-3% YoY growth in retails largely driven by marriage season demand (especially in key northern and eastern regions). Urban belts are relatively better-off v/s rural belts, benefiting the likes of TVSL/BJAUT/HMSI. Despite improvement in supply situation, Apache and Raider continue to have waiting periods of 15-30 days. However, average inventory for 2W players stands at 40-42 days with HMCL being the highest. Traction for new launch in RE (i.e. Hunter) continues to sustain as waiting period stands at 1.5-2.0 months (largely stable MoM). Demand for higher CC models was better-off; hence, we expect domestic RE dispatches to improve ~25% YoY v/s 6-7% YoY growth for HMCL/BJAUT/TVSL.

* PVs: Retails are likely to grow 14-16% YoY led by improving supply chain, traction in new launches and healthy order book across OEMs. We noted that MSIL’s Jimny currently has a backlog of 10-11k units, indicating a continued traction in new model launches. The other launch of MSIL i.e. Fronx has an order backlog of 4-5k so far. MM’s Thar 2WD variant, which has been launched at a starting price tag of INR1m, has been able to gain healthy traction with 65-70% bookings of the new variant (v/s 30-35% of the 4WD variant). MM took a price hike in Jan’23 with the highest being in ScorpioN (avg. price hike of INR55-75k in most models). Other models such as XUV700/XUV300/Bolero Neo have seen an average hike of INR10-25k/ unit. TTMT has announced a price hike in its ICE range from Feb’23. While there has been a supply chain improvement across OEMs, AMT variants for most of the models are still under high waiting periods. We expect MSIL/MM (incl. pickups)/TTMT’s volumes to grow at 5%/20%/8% YoY, respectively.

* CVs: Healthy demand momentum sustained as our channel checks suggest 10- 12% YoY growth in retails during the month. Inventory levels declined to 15-17 days from 28-30 until last month, as OEMs start transition to BS6-2. There was growth in inquiry level during the month despite moderating discounts, owing to demand recovery from construction activities. Consequently, fleet utilizationrate remained healthy at 78-80% (stable MoM). However, we are yet to see a broad-based recovery, especially through new fleet addition. We expect dispatches for AL to grow 19% YoY while the same is likely to decline 1% YoY for TTMT.

* Tractors: As per our interactions, agri sentiments continued to remain positive with healthy output and better realization for Rabi crops such as Wheat and Mustard. However, there is an anticipation of delayed harvesting as the sowing happened late this season due to delayed monsoon. Impact of late harvesting was visible on the monthly volumes as well, as retails for the month are likely to drop 8-10% MoM. However, on YoY basis, the growth is expected to range between 2-4%. Demand from non-agri segment continued to remain weak as it is still down by 20-25% v/s last year. This has largely been hit in states such as Jharkhand, Rajasthan and a few parts of MP. With OEMs continuing to bill higher, inventory level have increased to 38-40 days (v/s 33-35 until last month). We expect tractor volumes for MM/Escorts to grow at 11%/12% YoY.

* Valuation and view: We prefer 4Ws over 2Ws, on the back of strong demand along with a stable competitive environment. We expect the 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. Our top picks in the sector are MOTHERSO, AL and BHFC.

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