Automotive Sector – Quick Monthly Snapshot – Dec’21 – Weaker demand and increased Covid caseload impact on performance

According to the Society of Indian Automobile Manufacturers (SIAM), domestic auto sales volume (excluding CV) fell 11% year-on-year (down 3% month-on-month) to 12,53,604 units as of December 21. , various segments of the automotive industry saw a subdued annual performance, with PV and 2W registering a larger decline due to semiconductor supply issues and weak rural demand. Additionally, the rapid increase in Covid cases towards the end of the month also led to negative sentiment across the country and led to lower retail sales across all segments. Few segments like 3W and Bus segments recorded growth on a lower base, while some markets appeared to register a moderate performance, especially the rural market, due to a slower recovery. Overall, the volume of retail sales this time is assumed to be more or less in line with that of wholesale.

PV segment: Overall, PV volume was down 13% YoY (up 2% MoM) to 2,19,421 units, mainly impacted by shortage of semiconductor supply. Its UV sales were up 3% year-on-year (down 8% month-on-month), driven by higher production of new models by major OEMs. While MPV volume was down 17% YoY and 2% YoY, PC sales were down 23% YoY (up 12% YoY) on December 21. The Problem Semiconductor industry subsided sequentially but was not fully resolved, impacting annual production. Therefore, the waiting time for most products remains high.

Scooter and Motorcycle Segment: Scooter sales were down 24% YoY (down 20% YoY), while motorcycle sales fell 2% YoY (up 4% YoY monthly). Overall, 2W domestic volume was down 11% YoY (down 4% MoM). Moped sales were down 44% YoY (down 22% YoY). Additionally, 2W production was 5% lower than sales on December 21. Overall, two-wheeler sales were impacted due to weaker rural demand, amid heavy rainfall.

3W Segment: Domestic 3W sales increased 25% each on a yearly and monthly basis to 28,111 units on a low basis. 3W passenger carriers’ sales volume increased 57% year-on-year and 31% month-on-month, while 3W cargo carriers’ sales volume decreased 23% year-on-year (up 9% one month) in December 2021.

CV Segment: SIAM has stopped reporting monthly CV volume performance since the start of FY21 due to the unavailability of monthly CV volume data from some OEMs, and therefore reports quarterly volume performance. Thus, we analyze the data on a quarterly basis. During 3QFY22, overall domestic CV volume increased 1% YoY (up 17% QoQ) to 1,94,712 units, with M&HCV increasing 25% YoY (up 20% QoQ) to 63,964 units and LCVs down 8% YoY (up 16% QoQ) to 1,30,748 units.

Exports: Overall, exports edged down 0.1% YoY (up 4% MoM) to 4,63,176 units. PV exports were down 4% YoY (up 24% MoM), while 3W exports were up 11% YoY (up 1% MoM). Motorcycle exports increased by 1% YoY (+3% YoY) in December 21. While container availability and geopolitical issues in a few regions impacted export sales, they are expected to improve in the coming months and post double-digit growth in FY22E.

Inventory: In the PV segment, there was no corporate-level inventory, as production and sales volume were at the same level. In the 2W segment, inventory decreased at the corporate level, with production being 5% lower than sales volume.

Our view: Given the increase in Covid cases, we expect demand to remain subdued over the next 1-2 months, while rapid vaccination and increasing coverage would lead to a gradual recovery towards the end of FY22. We expect retail demand across all segments to see some recovery in FY23. We expect the impact of a slower recovery on automaker profitability in 3QFY22 to continue, due to higher raw material costs and the lag effect of the pass-through to end customers. . Moreover, this impact on margins would also be felt in 4QFY22. However, we believe the recent easing in raw material costs and recovery in volumes would improve operating margins in FY23, contrary to our expectation of a likely recovery in Q422 due to a delay due to the recent increase in Covid cases. Additionally, semiconductor supply constraints and container availability issues are expected to impact sales and production in the near term, which we believe will be resolved in FY23. We we expect the 3Ws and M&HCV segment to experience strong double-digit volume growth during FY22E and FY23E. We believe that the long-term fundamentals remain intact for the automotive sector. We believe now is the time to take a contrarian view on the two-wheeler segment, to post a sharp correction in stock prices. We expect the 2W segment to rebound in the domestic market as well as exports in FY23. In addition to valuation comfort, the risk-reward ratio is very favourable, which would provide strong outperformance going forward. We also like the PV segment amid the number of new launches next year and strong demand prospects supported by a healthy order book. Therefore, Maruti Suzuki, Bajaj Auto and TVS Motor remain our top picks.

Link to report

Source: Stock market bulls

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