Automobile Sector - Monthly Quick View - Mar'22 - Weaker Demand to Impact 4QFY22 Performance

As per the Society of Indian Automobile Manufacturers (SIAM), domestic auto sales volume (excluding CVs) de-grew by 18% YoY (up 13% MoM) to 14,95,848 units in Mar'22. 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, ongoing geopolitical issue has impacted consumer sentiment to some extent. Though overall demand remained subdued, there was MoM improvement in rural demand. Overall, the wholesale volume was higher than the retail due to inventory built up ahead of auspicious Navratra festival. Within auto space CV segment performed better due to year ending purchases to avail depreciation benefit.

PV Segment: Overall, PV volume de-grew by 4% YoY (up 6% MoM) to 2,79,501 units, primarily impacted by semiconductor supply shortage. Its UV sales grew by 8% YoY (up 10% MoM), led by a higher production of new models by key OEMs. While MPV volume de-grew by 19% YoY (up 2% MoM), PC sales decreased by 12% YoY (up 3% MoM) in Mar'22. Semiconductor issue eased out bit sequentially due to diversion of some shipments from Russia to Asian countries amid ongoing geopolitical issue but remained unresolved fully, impacting YoY production. Therefore, waiting period for most products still remains high.

Scooter & Motorcycle Segment: Scooter sales de-grew by 21% YoY (up 5% MoM), while motorcycle sales fell by 21% YoY (up 20% MoM). Overall, domestic 2W volume de-grew by 21% YoY (up 14% MoM). Moped sales de-grew by 16% YoY (up 5% MoM). Further, 2W production was 2% higher than the sales in Mar'22. Overall, two-wheeler sales were impacted due to the weaker rural demand, amid untimely rainfall.

3W Segment: Domestic 3W sales decreased by 1% YoY (up 19% MoM) to 32,088 units on a low base. 3W passenger carriers' sales volume grew by 6% YoY (up 19% MoM), while 3W goods carriers' sales volume de-grew by 14% YoY (up 18% MoM) in Mar'22.

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 4QFY22, overall domestic CV volume increased by 19% YoY (up 28% QoQ) to 2,49,806 units with M&HCVs increasing by 17% YoY (up 47% QoQ) to 93,974 units and LCV increasing by 20% YoY (up 19% QoQ) to 1,55,832 units.

Exports: Overall, exports grew by 3% YoY (down 3% MoM) to 4,51,058 units. PV exports grew by 53% YoY (up 20% MoM), while 3W exports decreased by 3% YoY (up 7% MoM). Motorcycle exports grew by 1% YoY (down 6% MoM) in Mar'22. While container availability and geopolitical issues in few regions impacted exports sales, it is expected to improve in the coming month.

Inventory: In the PV segment, inventory decreased at the company level, as production was 4% lower than the sales volume. In the 2W segment, inventory increased at the company level, as production was 2% higher than the sales volume.

Our View: Due to ongoing slowdown and negative implications of geopolitical issue, we expect demand to remain subdued over next 1-2 months, while gradual recovery is expected towards end of 1QFY23. Moreover, recent global geopolitical issues amid Russia-Ukraine war have negative impact on business environment, which creates negative demand sentiment for consumption. We expect the impact of a slower recovery and higher raw material cost on auto makers' profitability in 4QFY22, due to sharp run up in commodity cost and lag effect of passing on the same to end customers. Moreover, its impact on margins would be felt in 1QFY23 as well. However, we believe that gradual price hike and volume recovery would improve operating margins in 2HFY23, as against our expectation of likely recovery in 1HFY23 due to ongoing global turmoil. 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 2HFY23. We expect the 3Ws and M&HCV segment to witness a strong double-digit volume growth in FY23E. We believe the long-term fundamentals continue to remain intact for the automobile sector. We remain constructive on two-wheeler stocks amid attractive valuation. 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 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, TVS Motor, Bajaj Auto and Maruti Suzuki continue to remain as our top picks.

Link to the report

Source : Equity Bulls

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Automobile SectorUpdate MonthlyView March2022 RelianceSecurities