On expected lines, sales of passenger and commercial vehicles (CV) saw an uptick in February owing to improved supply of semiconductors and healthy demand. However, sales of two-wheelers (2W) and tractors remained subdued on account of lower demand and a high base of the last year.
Brokerage firms pointed out that the demand for passenger vehicles (PV) sustained and the improving trend in wholesales reflect an easing of supply chain issues even though the situation remains dynamic due to factors such as slowing growth momentum, higher commodity prices and geopolitical issues.
Automaker Mahindra & Mahindra said its sales saw an 89 percent year-on-year (YoY) jump in February while Tata Motors reported a 27 percent YoY jump in domestic sales in February. Maruti Suzuki saw a minor decline of 0.25 percent in February sales volume.
Sales of the two-wheeler segment were down in February. Hero MotoCorp, Bajaj Auto and Royal Enfield saw YoY declines of 29 percent, 16 percent and 15 percent, respectively, in February.
"While easing semiconductor supplies boost PV retails, 2W segment is yet to recover amid high cost of ownership. We prefer 4Ws over 2Ws, on the back of strong demand and offer a stable competitive environment," said brokerage firm Motilal Oswal Financial Services.
Arun Agarwal, Deputy Vice President - Fundamental Research, Kotak Securities, underscored that automobile companies reported mixed performance in February 2022 as the passenger vehicle and commercial vehicle segment continued to recover gradually but the two-wheeler and the tractor segment reported YoY decline in wholesale volumes.
"The passenger vehicle segment volumes improved sequentially supported by strong consumer sentiment and improvement in chip availability. Domestic two-wheeler demand is weak resulting in a sharp domestic sales volume decline over February 2021. Tractor segment performance has been impacted by channel destocking and high base. Commercial vehicle segment continued its recovery in February 2022 supported by economic activity pick-up and improving fleet operator profitability," said Agarwal.
Should you invest in the auto sector?
Analysts and brokerages are not enthusiastic about the auto sector. They see challenges ahead for the two-wheeler segment, especially after the entry of EV makers which will open the segment for many new players.
"I would recommend one should stay away from the two-wheeler segment because the entry of EVs are negative for the segment as it will see the entry of many new players into the two-wheeler segment," said G Chokkalingam, Founder, Equinomics Research & Advisory Pvt Ltd.
"In the passenger segment, one can buy Maruti Suzuki and Mahindra and Mahindra. One should wait for some time to see if the improvement on commercial vehicle segment sustains," Chokkalingam said.
Brokerage firm Motilal Oswal said it prefers companies with: (a) higher visibility in terms of demand recovery, (b) a strong competitive positioning, (c) margin drivers, and (d) balance sheet strength," said Motilal Oswal.
Motilal Oswal expects the CV cycle to maintain momentum. Maruti Suzuki and Ashok Leyland are the top original equipment manufacturer (OEM) picks of the brokerage. Among auto component stocks, Motilal Oswal prefers Bharat Forge and Apollo Tyres. It also likes Tata Motors as a play on the global PV cycle.
Another domestic brokerage firm JM Financial highlighted that the domestic PV segment demand remains strong and it expects a swift recovery as the chip shortage situation resolves.
"We expect new product launches to help drive excitement among buyers with the SUV segment retaining consumer pulling power in PV segment. We expect OEMs with higher export exposure to performing relatively better," said JM Financial.
For the two-wheeler segment, a healthy Rabi harvest may result in some improvement in sequential wholesales in the coming months.
"Momentum in the coming months for two-wheelers would be contingent upon improvement in rural sentiment and response to new EV launches. However, we see OEMs with higher export exposure to be relatively better placed to navigate the slowdown in the domestic market, enabling them to outperform their peers," JM Financial said.
JM Financial expects CV sales to continue to improve during Q4FY22 driven by improving fleet utilisation, freight availability and rates, and better financing. In the CV space, it expects volume momentum to improve sequentially going ahead, said the brokerage.