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MOSL: AUTOMOBILES: Demand momentum for PVs sustains, picks up for 2Ws

• Our interaction with leading industry channel partners indicates a demand recovery for 2Ws. Easing of semiconductor shortages has led to an improvement in PV wholesales. CVs are taking a breather due to a seasonally weak period, whereas demand for Tractors have been mixed in a seasonally strong period.
• Wholesale volumes for 2Ws/PVs/3Ws/CVs/Tractors are estimated to grow by 12%/16%/-1%/47.5%/9% YoY in Jul'22.
• 2Ws: Retail demand for 2Ws was reasonable in a seasonally weak Jul'22. Dealers have started building inventory ahead of the festival season that will start from Aug'22. Supply-side issues continue to impact Premium 2Ws, which is resulting in a waiting period. The recently launched TVS Ronin has started on a positive note. Inventory in the system has increased to 60 days (v/s 45-50 days till Jun'22) in a build-up to the festive season. Dealers are expecting the upcoming festival season to be better than last year. Improvement in RE's supply chain should reflect in improved wholesales. We expect 2W wholesales for BJAUT to grow by ~3% YoY (domestic 2Ws to grow by 12%), TVSL by ~18% (domestic 2Ws to grow by 12%), HMCL by ~12%, and RE by ~46%.
• PVs: The waiting period for PVs have fallen due to improving production from OEMs as semiconductor supplies improve. CNG remains the preferred fuel. PVs are commanding a waiting period of one-to-two months in most models and up to six months in a few variants. New models are creating a lot of excitement on the ground and driving footfalls at showrooms. For MSIL, CNG constitutes ~40% of its order book. Inventory in the system is 20-25 days. We expect PV volumes to grow by 6% YoY for MSIL, over 27.5% for MM (UVs including Pickups), and over 46.5% for TTMT.
• CVs: Retails have been slow due to a seasonally weak Jul'22. Demand from Cargo operators, with long-term contracts, remains buoyant. The recent hike in interest rates has adversely impacted demand. Financing is not a constraint, but underwriting remains stringent. LTV remains rangebound at 85-90% for large operators, but lower for small operators. Discounting is falling MoM. Inventory in the channel is at an optimal level of 20-30 days. In terms of CV wholesales, we expect AL to grow by 62% YoY (up 130%/8% YoY for M&HCVs/LCVs), TTMT by 46.5% (up 70%/35% for M&HCVs/LCVs), and VECV by 41.5%.
• Tractors: Retail demand remains muted in the seasonally strong Jul'22. Rainfall has been deficient in Uttar Pradesh and Bihar, leading to lower Kharif sowing. Agri demand remains subdued at present and Commercial demand is flat. Inventory in the system is ~30 days. We expect Tractor volumes to grow by ~10%/5% YoY for MM/ESC.
• 3W: Shared mobility has returned to pre-COVID levels as the economy has opened up. Financing remains a concern due to the stressed income of drivers, resulting in NPAs. Many unorganized players have entered the e-Rickshaw space and are taking away market share from incumbents. Supply-chain constraints have started affecting 3W wholesales, resulting in a waiting period of one-to-three weeks. We expect domestic 3W volumes to decline by 8.5% YoY for BJAUTO, but grow by 2% for TVSL and 100% for MM (on a low base). Exports will fall by 8% YoY for TVSL and 28% for BJAUT (due to the ban on 3Ws in Egypt and supply and logistics issues).
• Valuation and view: While easing semiconductor supplies boost PV retails, the demand momentum in CVs is sustaining. The 2W segment is showing early signs of a recovery. We prefer 4Ws over 2Ws on the back of strong demand and as it offers a stable competitive environment. We expect the momentum in the CV cycle to continue. We prefer companies with: a) higher visibility in terms of a demand recovery, b) a strong competitive positioning, c) margin drivers, and d) balance sheet strength. MSIL and AL are our top OEM picks. Among Auto Component stocks, we prefer BHFC and APTY. We also like TTMT as a play on the global PV cycle.