Demand Weakness across Segments; Semiconductor Shortage Resolved Partially - Reliance Securities

Key Findings:

Demand weakness continued across segments, though PVs performed better within peer group. Much slower recovery in rural led to highly subdued sales performance for most companies. Recovery is slower across segments. This is also visible in muted performance of rural-centric vehicles like tractors and 2Ws in Dec'21. Volume across most segments fell on a YoY basis, while MoM performance was mixed.

2W segment witnessed a highly subdued performance, while PV segment saw a much better performance as the semiconductor shortage seems to be resolved partially. Tractor volume witnessed a sharp double-digit YoY as well as MoM decline. However, CV and 3W segments delivered decent YoY growth albeit on a lower base.

Overall wholesale volume was more or less in line with weaker retail volume for 2Ws, CVs and tractors. Retail PV volume was better than wholesale volume, due to production constraints with higher waiting period continuing.

Channel check suggests that overall sales performance was weak across segments during the post festive period in Dec'21. We expect volume pressure to continue over the next 1-2 months, amid rising Covid cases, new variant and increasing restrictions in various states by governments. Sales may pick up in FY23 with a healthy rabi crop, which may change the rural sentiment.

Key Highlights:

Indian automobile companies reported a subdued sales performance on YoY basis, while there was a mixed performance on MoM basis due to weak retail demand in Dec'21. Consumer sentiment remained weak in Dec'21 amid the low rural sentiment, rising Covid cases & new variant, increasing governments' restrictions despite a better monsoon scenario and agri output. Sector also got impacted by higher fuel prices, sharp increase in vehicle prices and lower business sentiment.

Retail volume was higher than the wholesale volume in PVs due to production constraints. In case of 2W, CV and 3W segments, no major change in inventory is observed.

Our View

Though a higher vaccination coverage is expected to support retail demand in the coming months, we expect the industry to record a subdued volume over the next 1-2 months, as recovery of rural economy is impacted by an uneven monsoon, slow revival and recent surge in Covid cases. Though we believe an increasing vaccination coverage coupled with likely strong agri output in the rabi season would support auto sales in 4QFY22, the key monitorable is how the Covid situation pans out in the coming days. We expect only M&HCV and 3W segments to witness a double-digit volume growth in FY22E. Nonetheless, long-term fundamentals continue to remain intact for automobile sector, in our view.

2W: BAL's sales de-grew by 3% YoY (down 4% MoM) to 3,62,470 units, while HMCL's sales fell by 12% YoY (up 13% MoM) to 3,94,773 units. TVSL's sales de-grew by 8% YoY (down 8% MoM) to 2,50,933 units.

PV & CV: M&M's auto volume grew by 11% YoY (down 2% MoM) to 39,157 units, while MSIL's volume de-grew by 4% YoY (up 10% MoM) to 1,53,149 units. AL's volume de-grew by 2% YoY (up 19% MoM) to 12,518 units and TTMT reported sales of 69,612 units (up 24% YoY and up 12% MoM).

Tractor: M&M's tractor volume de-grew by 19% YoY (down 34% MoM) to 18,269 units and Escorts' tractor sales volume de-grew by 39% YoY (down 34% MoM) to 4,695 units.

Our Top Picks: Ashok Leyland, RK Forgings and TVS Motors

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Source : Equity Bulls

Keywords

AutoSector DemandWeakness RelianceSecurities December2021Update