scorecardresearchCVs, PVs or 2-wheelers: Which auto segment will drive growth better this year?

CVs, PVs or 2-wheelers: Which auto segment will drive growth better this year?

Updated: 02 Jan 2023, 02:24 PM IST
TL;DR.
Brokerage house Motilal Oswal, in its note, said that it prefers CVs and PVs (4-wheelers) over 2-wheelers, on the back of a strong order book, traction for new model launches and a stable competitive environment.
Experts do not see the auto sector performing well in the new year. In fact, they expect the industry to have challenges on all fronts.

Experts do not see the auto sector performing well in the new year. In fact, they expect the industry to have challenges on all fronts.

The auto sector rose over 15 percent in 2022 on the back of a recovery in demand post the pandemic and as the chip shortage issue eased in the semiconductor industry.

However, experts do not see the auto sector performing well in the new year. In fact, they expect the industry to have challenges on all fronts.

"In the coming year, the auto sector is unlikely to perform well. This is due to the fact that the pent-up demand for automobiles is now coming to an end. Several new models are being aggressively pushed by automakers, particularly in the SUV segment. The growth in automobiles, which was largely driven by SUVs, now appears to be overcrowded, which will further dampen the sector's growth and lead to a drop in demand. Furthermore, demand in the export market has been muted, which will eventually have an impact on the industry's overall topline and bottom line growth," said Sunil Damania, Chief Investment Officer, MarketsMojo.

Dhiraj Relli, MD & CEO, HDFC Securities, also stated that the outlook for the auto sector is likely to be challenging in 2023 given: 1) the expectation of sustained inflationary pressure 2) rising interest rates 3) recessionary trends in US-Europe that may have some rub-off impact on our own economic growth and hence consumption patterns. Overall, Relli expects growth rates to normalise for the auto sector in 2023 as the base effect normalises.

Aditya Welekar, Senior Research Analyst, Axis Securities, foresees both tailwinds and headwinds ahead for the auto space in CY23. While he expects all segments to post YoY growth in CY23, the growth momentum could be slower than in CY22. Higher interest rates may also offset the growth, he added.

As post-Covid pent-up demand for PVs gets fulfilled (along with price hikes in 2023), real-time driving emission norms (From Apr '23) and safety regulations related to six airbags from Oct’23 may limit YoY growth in sales in CY23, noted Welekar.

Passenger vehicles (PVs), commercial vehicles (CVs) or two-wheelers (2Ws) - which segment will perform better?

Within autos, Relli expects the PV segment to outperform the other two in 2023. His top picks in auto OEMs are Maruti, M&M and TVS Motors.

Ashwin Patil, Senior Research Analyst at LKP Securities, also said that the PV segment is one of the segments to watch out for, followed by CVs and then 2Ws.

Meanwhile, Aditya Welekar of Axis Securities, sees the CV segment growing faster than the PVs and 2Ws, led by infrastructure projects and fleet replacement demand. He expects two-wheelers to post lower growth than CV and PV segments, with the overall acquisition cost of 2-wheelers rising further in CY23 due to the advent of real-driving emission norms from April 2023. Within 2-wheelers, it expects higher growth for the 125+cc segment bikes as the premiumisation trend is visible.

For entry-level bikes, rural recovery will be a crucial monitorable in CY23, Welekar added. ICE scooters will be more vulnerable to EV transition and 2023 could witness a further increase in EV penetration for scooters with stiff competition between OEM players like Bajaj/TVS/Hero and pure play 2W EV manufacturers like Hero Electric, Ola Electric, Ather, Okinawa, etc, said Welekar.

Brokerage house Motilal Oswal, in its note, said that it prefers CVs and PVs (4-wheelers) over 2Ws, on the back of a strong order book, traction for new model launches and a stable competitive environment.

"We expect the CV cycle to maintain its momentum led by a healthy fleet utilization level at 78-80%, strong demand in underlying industries and a better supply chain situation. We prefer companies with: a) higher visibility in terms of demand recovery, b) a strong competitive positioning, c) encouraging margin drivers, and d) a strong balance sheet. MSIL and AL are our top OEM picks. Among auto component stocks, we prefer Motherson Sumi and Bharat Forge," it stated.

As per the brokerage, after a healthy recovery over the last two to three months, the 2W demand momentum has slowed down again, resulting in an expected decline of 5-7 percent YoY for retail volume in December 2022. While the rural sentiments are turning positive, it is not yet benefitting 2W demand, especially in the lower-end segment, noted the brokerage.

Meanwhile, it expects PV retails to grow 9-11 percent YoY in December 2022, led by a healthy order backlog and high discounting.

For CVs, the brokerage highlighted a recovery in demand sentiments, led by sequential growth in fleet utilization level to 78-80 percent, an increase in freight rates by 1.5-2 percent, and increasing discounts. Hence, it sees a 12-14 percent YoY growth in retail volumes during the month. This has helped transporters offset the impact of rising interest costs to some extent, noted the brokerage. 

While the demand is majorly driven by large fleet operators, there has been a gradual pickup in demand from small fleet operators as well, however, it added that a broad-based recovery in both the customer segments is yet to be seen, especially through new fleet additions.

Article
We explain what is compound annual growth rate (CAGR)
First Published: 02 Jan 2023, 02:24 PM IST