August auto sales preview: Weak month for 2Ws, tractors; PV, CV may show some improvement

Increasing cost pressure and uneven rainfall may have kept the auto sales numbers subdued in August which is, in the first place, considered a weak month for auto sales.

Estimates of brokerage firms show that two-wheeler (2W) retail demand was expected to pick up this month, but the same has not yet materialized while tractor retails are weak due to uneven rainfall.

Passenger vehicle (PV) wholesales may show an uptick due to an improvement in semiconductor supplies while commercial vehicle (CV) demand may be stable.

"In August 2022, wholesale volumes are estimated to grow by 5% for 2Ws, 51% for PVs, 11% for 3Ws, 27% for CVs and flat for tractors on a year-on-year (YoY) basis," said brokerage firm Motilal Oswal Financial Services.

"We prefer 4Ws over 2Ws on the back of strong demand and as it offers a stable competitive environment. We expect momentum in the CV cycle to continue. We prefer companies with: a) higher visibility in terms of demand recovery, b) a strong competitive positioning, c) margin drivers, and d) balance sheet strength," said the brokerage firm.

Maruti Suzuki and Ashok Leyland are Motilal's top OEM (original equipment manufacturer) picks. Among auto component stocks, it prefers Bharat Forge and Apollo Tyres.

Brokerage firm Emkay Global is of the view that CVs may maintain positive growth momentum while PV volumes should be higher, thanks to the large order book and increase in production. 2W volumes would improve due to inventory build-up with dealers in the run-up to the festive season but tractor volumes are likely to decline due to muted sentiment, the uneven spread of monsoons and lower sowing acreage.

Emkay believes 2W volumes will improve due to festive demand (Ganesh Chaturthi and Onam) and inventory buildup with dealers.

It expects domestic volumes to improve by 59% YoY for Royal Enfield, 19% for TVS Motors, 17% for Bajaj Auto and 9% for Hero MotoCorp. Royal Enfield volumes would be robust, on the strong response to the new model Hunter, given order bookings of more than 25,000 units.

For the CV segment, Emkay Global expects positive growth at 126% YoY for M&M, 54% for Ashok Leyland, 29% for Eicher Motors CV and 26% for Tata Motors in the domestic market.

Among OEMs, Emkay thinks domestic volumes to grow by 75% YoY for M&M, 66% for Tata Motors and 36% for Maruti. The volume tally for M&M and Maruti would further pick up in September, with the commencement of dispatches of new products (Scorpio-N for M&M and Vitara for Maruti), said Emkay.

Tractor volumes are likely to remain subdued due to weak sentiment caused by an uneven spread of monsoons and lower Kharif sowing acreage.

"The geographical spread of monsoons continues to be a concern for states such as UP, Bihar and Jharkhand. As of August 19, Kharif sowing is 2% below last year’s, with 8% lower rice sowing. We expect a decline of 10% YoY for M&M and 13% for Escorts, in domestic volumes," said Emkay.

"We retain our positive view on the auto sector, with our preferred picks such as Maruti, Tata Motors, M&M, Escorts and Ashok Leyland," said Emkay.

After underperforming in the years 2020 and 2021, the auto index is outperforming the benchmark in 2022 so far. But the sector continues facing headwinds in terms of semiconductor chip supply, worsening geopolitical situation, higher input costs and a fresh rise in crude oil prices.

Brokerage firm ICICI Securities pointed out that the valuation multiples of several auto OEMs have reached upcycle levels, leaving little scope for further rerating.

"With limited triggers for further earnings upgrades and rerating, we downgrade Bajaj Auto to a 'reduce' from a 'hold', and Eicher Motors to an 'add' from a 'buy'. Our top picks in the space are Tata Motors (buy with a target price of ₹646), Ashok Leyland (buy with a target price of ₹183), TVS Motors (buy with a target price of ₹1,093) and Maruti Suzuki (buy with a target price of ₹10,042)," said ICICI Securities.

Disclaimer: The views and recommendations are those of individual analysts or broking firms, not of MintGenie.