Auto sales numbers are likely to continue remain subdued for the month of March as the sector continues to face multiple challenges dragging volumes lower.
In fact, the domestic automobile industry has been witnessing multiple challenges for the last five years. As the brokerage firm JM Financial points out, right from emission changes, mandatory third party motor insurance, safety-related regulations (mandatory anti-lock braking system and combi-brake system, driver-side airbags, speed warning alarm, seatbelt reminder alarms, crash test norms compliance, etc.) to numerous rounds of commodity-inflation led price hikes, all have contributed to the increase in the upfront acquisition cost of a vehicle by 20-35 percent.
At this time when crude oil prices have jumped sharply and the economy is showing signs of stress, nothing seems to be in favour of the auto sector.
Commercial Vs Passenger Vehicles
The March sales numbers may show slight upward movement for commercial vehicles (CVs) but the rest other segments may remain low on a yearly basis.
Domestic brokerage firm Emkay Global expects on a year-on-year basis, upward sales momentum to continue in commercial vehicles but passenger vehicle (PV) industry volumes may be slightly lower than last year owing to supply constraints. Two-wheelers (2Ws) and tractors are likely to decline notably due to subdued customer sentiments and the high base effect.
"We retain our positive view on the auto sector, underpinned by expectations of a cyclical upturn in the next three years. We like Tata Motors, Ashok Leyland, Maruti Suzuki and TVS Motors," said Emkay Global.
Along similar lines, brokerage firm Motilal Oswal Financial Services expects PV demand to remain strong while CV customers might have turned cautious towards the end of the month led by fuel price hikes.
"Two-wheelers retail continued to remain under stress with hopes emanating from the upcoming marriage season and higher funds available to the consumers due to Rabi crop harvesting, according to our interactions with leading industry channel partners," Motilal Oswal said.
Brokerage firm Nirmal Bang expects on a monthly basis sales for PV segments may also improve along with the CV segment, with improving chip availability. However, the brokerage believes that supply-side issues will worsen amidst the ongoing Russia-Ukraine conflict.
On the demand side, Nirmal Bang sees healthy traction in PVs due to improving availability and new models. There has been no major price action in March, although the brokerage expects some price hikes from original equipment manufacturers (OEMs) in April to combat rising commodity prices.
Nirmal Bang also agrees that demand continued to remain muted for 2Ws in March on a higher base and weak rural sentiments. Entry-segment motorcycle and scooter segments are expected to be affected the most. The scooter segment is further being affected by the increasing share of electric vehicles (EVs).
"EVs continue to gain market share amid increasing fuel prices. However, we expect a recovery in the 2W segment on a month-on-month basis. We believe that 2W demand will further see recovery from April onwards amid improving cash flows in rural markets, opening up of education institutes and upcoming wedding season," said Nirmal Bang.
The outlook for the CV segment is better owing to the demand scenario. As per Nirmal Bang, further improvement in freight utilization (as economic activities gather pace) and stable demand from infra and construction sectors should support CV demand in the coming months. Tractors are expected to witness a decline on a year-on-year as well as month-on-month basis due to a high base and weak rural sentiments.
"We note that rural sentiments are expected to improve following a good rabi harvest, which should augur well for the industry in the coming months, although growth momentum could slow due to the peaking tractor demand cycle. We prefer Mahindra and Mahindra in PVs and tractors, Bajaj Auto and TVS in 2Ws and Ashok Leyland as a play on the impending CV cycle recovery. We maintain our relatively cautious stance on Maruti, Hero MotoCorp, Eicher, Escorts and Tata Motors," Nirmal Bang said.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.