As per a report on the Automobile sector by Motilal Oswal Financial Services; leading industry channel partners reflect optimism for an overall good festive season for automobile retail despite the slow start.
"Current two-wheeler (2W) inventory at 40-60 days is in line with expected demand for the remaining festive season; private vehicle (PV) inventory is also at comfortable level of 25-35 days. Inquiries are at par with last year. Large Commercial Vehicle (LCV) demand has recovered and is now gaining momentum. Demand for Medium & Heavy Commercial Vehicle (M&HCV) is from infrastructure and construction sectors. Overall, consumer sentiment has improved; however, urban customers are still cautious given the uncertain environment," Motilal Oswal has said in a report.
Wholesales in Oct'20 are expected to grow YoY for all segments (excl. M&HCVs) due to good demand and normalizing of supply chain bottlenecks at the OEM level. Demand remains skewed toward semi-urban and rural market for 2Ws/PVs. Tractor demand remains strong with growth in retails in most markets, however, capacity constraints are expected to restrict wholesales in Oct'20.
According to the broking firm, in Oct'20, wholesale volumes are estimated to grow 17.5%/15% for 2Ws/PVs due to sustained demand and inventory refilling. Decline in commercial vehicles (CV) (excl. Tata) was restricted to 6.4% YoY, driven by 18% growth in LCVs and 12% YoY decline in M&HCVs. Wholesale volumes for tractors should be flat YoY due to supply side constraints. Wholesales would be higher than retails due to inventory refilling for anticipated festive demand.
2W Retails declined <10% during Navratras and Dusshera due to slow start as well as one less day than usual. However, there was some pick-up during the second half of Navratras, but it was still lower YoY. Dealers are optimistic of good sales during Nov'20 on the back of (1) inquiries being at par with last year, (2) improved cash-flow to farmers, (3) sales to customers who are holding off purchases in expectation of discounts, and (4) completion of election in Bihar and MP (by-elections). Wholesales are expected to remain flat for RE, majorly due to supply side constraints and growth of 6.3% for Bajaj (3% growth in domestic 2W), 25% for Hero and ~13% for TVS.
PV retail sales were better than 2W sales. MSIL is in a better position than peers due to its entry-level portfolio. Supplies are barely able to meet demand; therefore, Maruti is expected to end the festive season with minimal inventory. Volumes are expected to grow ~17.3% for MSIL (on low base) and 7.5% for M&M's UV (incl. pickups).
Sales of CVs has started showing initial signs of recovery. Inquiries have increased and financiers have cautiously started approving LTV up to 90-95% (v/s 75-85% earlier) on case-to-case basis. Majority of the current demand is driven by infrastructure and construction segments. M&HCV cargo segment demand is still very low due to excess capacity. LCV and SCV demand has reached pre-COVID levels. Barring the shortfall in few models, inventories have reached to comfortable levels.
Valuation and View
According to the Motilal Oswal report while festive season performance has been mixed bag so far, strong dealer sentiment suggests better performance in Nov'20. Valuations are reflecting recovery from 2HFY21, leaving limited margin for safety for any negative surprises. Hence, 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. M&M and HMCL are top OEM picks. Among auto component stocks, MSS and ENDU are preferred.