Mr. Mitul Shah - Head of Research at Reliance Securities.
As per the Society of Indian Automobile Manufacturers (SIAM), domestic auto sales volume (excluding CVs) grew by 245% YoY (up 8% MoM) to 15,32,809 units in May'22. Notably, all segments of the automobile industry witnessed a strong YoY performance due to low base (as May'21 was impacted by Covid-2 wave). Therefore, MoM improvement is more meaningful rather than YoY. Rural recovery supported the performance of 2Ws in May'22. Despite, component supply constraint and ongoing geopolitical issue continue to impact consumer sentiment to some extent, overall demand remained strong on YoY basis as well as MoM. It witnessed sequential improvement due to marriage season, gradual recovery in the rural market and reduction in fuel prices. Overall demand level remained below pre Covid level across segments. The wholesale volume was higher than the retail due to inventory built up citing better sales during ongoing marriage season and expected rural improvement ahead with normal monsoon. Rural market has exhibited signs of improvement because of better crop realisation at higher pricing, however, rural sentiment got impacted towards end of the month due to wheat export ban. Channel check suggests that overall sales performance started improving in FY23 so far, backed by all around recovery, and rationalized fuel prices. We expect volume improvement to continue steadily with likely normal monsoon driven by rural recovery over the next 3-4 months, while it would pick up in 2HFY23 with beginning of festivals and likely healthy agri output.
PV Segment: Overall, PV volume grew by 185% YoY (flat MoM) to 2,51,052 units, primarily impacted by semiconductor supply shortage. UVs sales grew by 157% YoY (down 9% MoM), led by a higher production of new models by key OEMs. While MPV volume grew by 695% YoY (down 7% MoM), PC sales increased by 199% YoY (up 10% MoM) in May'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 production. Therefore, waiting period for most products still remains high.
Scooter & Motorcycle Segment: Scooter sales grew by 660% YoY (up 6% MoM), while motorcycle sales grew by 178% YoY (up 12% MoM). Overall, domestic 2W volume grew by 253% YoY (up 9% MoM). Moped sales grew by 393% YoY (down 9% MoM). Further, 2W production was 1% higher than the sales in May'22. Overall, two-wheeler sales improved due to the rural recovery.
3W Segment: Domestic 3W sales increased by 2x YoY (up 36% MoM) to 28,542 units on a low base. 3W passenger carriers' sales volume grew by 2.8x YoY (up 60% MoM), while 3W goods carriers' sales volume grew by 1.2x YoY (down 6% MoM) in May'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.
Exports: Overall, exports de-grew by 1% YoY (down 11% MoM) to 4,32,227 units. PV exports grew by 79% YoY (up 22% MoM), while 3W exports decreased by 38% YoY (down 23% MoM). Motorcycle exports de-grew by 3% YoY (down 13% MoM) in May'22. While container availability, semi-conductor supply issue for high end bikes 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 1% 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 2-3 months, while gradual recovery is expected towards end of 1HFY23. 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 1QFY23, 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 1HFY23 as well. However, we believe that gradual price hike and volume recovery would improve operating margins in 2HFY23. 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, M&M and Maruti Suzuki continue to remain as our top picks. TVS still remains our top conviction BUY idea.