The automobile sales volume for the month of May came on expected lines for passenger vehicles (PVs) commercial vehicles (CVs) and two-wheelers (2Ws) segments. However, tractor sales failed to meet the expectations.
Analysts and brokerage firms pointed out that easing semiconductor supplies helped PV retail sales and CVs continue growing on improving economic activities and high capacity utilization. The 2Ws segment is yet to recover amid high cost of ownership.
As Motilal Oswal Financial Services highlighted, volumes of 2W segment grew 2.7 times, 2.3 times, 86 percent and 4 percent year-on-year (YoY) for Hero MotoCorp, Royal Enfield, TVS Motor and Bajaj Auto, respectively. Maruti Suzuki, Mahindra & Mahindra and Tata Motors PV volumes grew 3.5 times, 2.9 times and 2.8 times YoY, respectively. M&HCV (medium and & heavy commercial vehicles) and LCV (light commercial vehicles) volumes grew 3.5 times and 3.1 times YoY, respectively. Volumes for Ashok Leyland, Tata Motors, VECV rose 4.1 times, 2.9 times and 4.6 times YoY, respectively.
Mixed trend to continue
As the brokerage firm ICICI Securities pointed out, modest growth in 2W and tractor despatches signals rural market revival expectations from original equipment manufacturers (OEMs).
"PV OEMs are gradually ramping-up production by improving chip supply as volume rebound continues with a focus on launches of CNG variants and refreshes of popular models, even as acceptance of new brands get reflected in improved overall volumes of XUV700, Tata Punch. Continued price hikes (nearly 10 percent across segments since Jan’21) and a recent price hike of 1-2 percent in April, coupled with the incremental risk of rising fuel costs could impact the focus on hygienic personal mobility as offices/schools resume," said ICICI Securities.
In May, all major OEMs witnessed sequential improvement in volumes supported by positive sentiments and marginal improvement in component supplies.
In the 2Ws segment, the entry-level segment witnessed strong month-on-month (MoM) sales on improving rural sentiments and marriage-season demand. 2W export demand was affected by freight availability and currency volatility, brokerage firm JM Financial highlighted.
Jm Financial believes the near-term 2W domestic demand will be contingent on the continuation of sales movement post the marriage season while tractor demand is likely to be supported by record Kharif sowing and normal monsoon forecast.
As per the brokerage firm, in the PV segment, wholesales in the near term are likely to be a function of normalisation of chip supply and new model launches while it expects CV volumes to be supported by demand from infrastructure and construction sectors.
Brokerage firm Kotak Securities pointed out that the auto segment volumes recorded sequential improvement in May mainly on account of the wedding season, partly impacted by the chip shortage. Export 2Ws witnessed a decline in volumes on a YoY basis.
"The tractor segment performed above our expectations mainly led by better price realizations for crops. The CV segment performance was in line with our expectations. We expect M&HCV segment volume recovery to continue led by improvement in fleet operators’ profitability as well as fleet utilization levels," said Kotak.
LKP Securities highlighted that May witnessed a strong performance for almost all the auto majors sequentially in the domestic markets except tractors.
"On a YoY basis, May was unusually high on a very low base as the base month had witnessed a very severe wave-2 of the Covid-19 pandemic. Therefore, it does not make sense to compare any numbers on a YoY basis," said LKP Securities.
LKP Securities underscored that Maruti Suzuki reported good numbers as the chip shortage issue is gradually resolved. Tata Motors grew well on its CV business along with Ashok Leyland. The ongoing marriage season in rural parts of North India yielded some positivity in 2W sales.
On the PV front, though the supply side concerns are reducing, most of the OEMs have still not achieved the pre-pandemic levels of production and industry experts believe that it will take at least two-three quarters more for the complete recovery.
High-end two-wheelers along with PVs are also facing the brunt of the semi-conductor chip shortage issue. In May, LCV segment surpassed MHCV performance to a good extent. The tractors segment after a weak FY22 has seen a strong surge in numbers in May on a YoY basis. However, we saw a slight sequential decline in tractor sales as there was a ban on exports of various food grains like wheat, sugar, etc. in the latter half of the month, said LKP Securities.
Motilal Oswal prefers 4Ws over 2Ws aided by strong demand and a stable competitive environment. The brokerage firm expects the CV cycle to maintain its momentum.
"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. Maruti and Ashok Leyland are our top OEM picks. Among auto component stocks, we prefer Bharat Forge and Apollo Tyres. We also like Tata Motors as a play on the global PV cycle," said Motilal Oswal.
Disclaimer: The views and recommendations made above are those of individual analysts or broking firms and not of MintGenie.