Automobile Sector - Monthly Quick View - Dec'21 - Weaker Demand and Rising Covid Caseload Impact Performance

As per the Society of Indian Automobile Manufacturers (SIAM), domestic auto sales volume (excluding CVs) de-grew by 11% YoY (down 3% MoM) to 12,53,604 units in Dec'21. Notably, various segments of the automobile industry witnessed a subdued YoY performance, with PV & 2W seeing the higher decline due to semiconductor supply issues and weak rural demand. Moreover, rapidly rising Covid cases towards end of the month also resulted into negative sentiment across country and led to lower retail sales across segments. Few segments like 3Ws and Bus segments reported growth on a lower base, while some markets appeared to witness a subdued performance, particularly rural market, due to slower recovery. Overall, the retail sales volume this time is assumed to be more or less in line with wholesale.

PV Segment: Overall, PV volume de-grew by 13% YoY (up 2% MoM) to 2,19,421 units, primarly impacted by semiconductor supply shortage. Its UV sales grew by 3% YoY (down 8% MoM), led by a higher production of new models by key OEMs. While MPV volume de-grew by 17% YoY and 2% MoM, PC sales decreased by 23% YoY (up 12% MoM) in Dec'21. Semiconductor issue eased out bit sequentially but remained unresolved fully, impacting YoY production. Therefore, waiting period for most products still remains high.

Scooter & Motorcycle Segment: Scooter sales de-grew by 24% YoY (down 20% MoM), while motorcycle sales fell by 2% YoY (up 4% MoM). Overall, domestic 2W volume de-grew by 11% YoY (down 4% MoM). Moped sales de-grew by 44% YoY (down 22% MoM). Further, 2W production was 5% lower than the sales in Dec'21. Overall, two-wheeler sales were impacted due to the weaker rural demand, amid untimely rainfall.

3W Segment: Domestic 3W sales increased by 25% each on YoY and MoM basis to 28,111 units on a low base. 3W passenger carriers' sales volume grew by 57% YoY and 31% MoM, while 3W goods carriers' sales volume de-grew by 23% YoY (up 9% MoM) in Dec'21.

CV Segment: SIAM has stopped reporting the monthly CV volume performance since the beginning of FY21 due to unavailability of monthly CV volume data of select OEMs, and hence reports a quarterly volume performance. Thus, we analyse the data on a quarterly basis. During 3QFY22, overall domestic CV volume increased by 1% YoY (up 17% QoQ) to 1,94,712 units with M&HCVs increasing by 25% YoY (up 20% QoQ) to 63,964 units and LCV declining by 8% YoY (up 16% QoQ) to 1,30,748 units.

Exports: Overall, exports de-grew marginally by 0.1% YoY (up 4% MoM) to 4,63,176 units. PV exports de-grew by 4% YoY (up 24% MoM), while 3W exports increased by 11% YoY (up 1% MoM). Motorcycle exports grew by 1% YoY (up 3% MoM) in Dec'21. While container availability and geopolitical issues in few regions impacted exports sales, it is expected to improve in the coming months and would report a double-digit growth in FY22E.

Inventory: In the PV segment, there was no inventory at the company level, as production and sales volume were at the same level. In the 2W segment, inventory decreased at the company level, as production was 5% lower than the sales volume.

Our View: Considering a rising Covid cases we expect demand to remain subdued over next 1-2 months, while rapid vaccination and increasing coverage would result into gradual recovery towards FY22-end. We expect retail demand across segments to witness some recovery going forward in FY23. We expect the impact of a slower recovery on auto makers' profitability in 3QFY22 to continue, due to the higher commodity cost and lag effect of passing on the same to end customers. Moreover, this impact on margins would be felt in 4QFY22 as well. However, we believe that recent softening in commodity cost and volume recovery would improve operating margins in FY23, as against our expectation of likely recovery in 4QFY22 due to delay on account of recent surge in Covid cases. Moreover, semiconductors supply constraints and container availability issues are expected to impact sales and production in the near term, which we believe would get resolved in FY23. We expect the 3Ws and M&HCV segment to witness a strong double-digit volume growth in FY22E and FY23E. We believe the long-term fundamentals continue to remain intact for the automobile sector. We believe that now it is time to take a contrarian view on the two-wheeler segment, post a sharp correction in stock prices. We expect the 2W segment to bounce back in domestic as well as exports in FY23. Along with a valuation comfort, the risk-reward is highly favourable, which would give a strong outperformance going ahead. We also like PV segment amid number of new launches next year and strong demand outlook supported by healthy order book. Therefore, Maruti Suzuki, Bajaj Auto and TVS Motor continue to remain as our top picks.

Link to the report

Source : Equity Bulls

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Automobile AutoSector December2021 QuickView BusinessUpdate RelianceSecurities