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MOSL: AUTOMOBILES: PV wholesales continue to improve; CV demand is stable

.  AUTOMOBILES: PV wholesales continue to improve; CV demand is stable

• Our interaction with leading industry channel partners indicate a mixed bag for Autos. PV wholesales are improving due to an improvement in semiconductor supplies. 2W retail demand was expected to pick-up in Aug’22, but the same has not yet materialized. CV demand remains stable, while Tractor retails weak due to an uneven rainfall.
• In Aug’22, wholesale volumes are estimated to grow by 5%/51%/11%/27%/flat YoY for 2Ws/PVs/3Ws/CVs/Tractors.
• 2Ws: July and August are considered weak months for 2W retails. However, an improvement was expected in Aug’22, given the mini-festivals in some parts of India though Ganesh festival related demand is yet to come (starts 31^st Aug). Though this has not panned out well, dealers expect retails to pick up during the festival season. Initial feedback about the newly launched RE Hunter has been encouraging as it has been successful in attracting non-RE customers to showrooms. Improvement in RE’s supply-chain should reflect in improved wholesales. Some Xtec variants in HMCL’s Entry/Exe level portfolio are facing semiconductor shortages. Inventory in the system stands at 60-65 days in run-up to the festive season. We expect 2W wholesales for BJAUT/TVSL to decline by ~4%/~12% YoY (domestic 2W growth of 8%/15%), remain flat for HMCL, and grow by ~52.5% for RE.
• PVs: The waiting period for PVs has fallen due to improving semiconductor supplies. The manual variants for TTMT are readily available, while there is a waiting period for automatic variants. For MSILs Grand Vitara, the strong hybrid variants constitute ~50% of bookings. There has been a 10-15% impact on CNG vehicle bookings due to rising gas prices. For MSIL, CNG constitutes ~35% of its order book. Inventory in the system is ~30 days. Volumes are expected to grow by 37.5% YoY for MSIL, over 90% for M&M (UVs including Pick-ups), and more than 71% for TTMT’s PV business.
• CVs: Retails have been slow as August is a seasonally weak month. Demand from Cargo operators with long-term contracts remain buoyant. OEMs are offering discounts to gain market share, but this is expected to be temporary. The recent hike in interest rates has led to some adverse impact on demand. Financing is not a constraint, but underwriting remains stringent. LTV remains rangebound at 85-90% for large operators and lower for small operators. Inventory in the channel is at optimal levels of 20-30 days. We expect CV wholesales for AL to grow by 52% YoY (up 82%/22% in M&HCVs/LCVs), by 20% for TTMT (up 28%/15% in M&HCVs/LCVs), and by 30% for VECV.
• Tractors: August remains a seasonally weak month for Tractors. Deficient rainfall in Uttar Pradesh, Bihar, and Jharkhand, led to lower Kharif sowing, thus affecting farmer sentiment. Agricultural demand is currently subdued, while Commercial demand is flat. Inventory in the system is ~30 days. Tractor volumes are expected to grow by ~4% YoY for MM, but decline 15% for ESC.
• 3W: We expect 3W volumes to grow by 11% YoY, aided by a 14%/70% (on a low base) growth in BJAUTO/MM and a 5% decline for TVSL. Exports for BJAUTO are expected to grow by 5% YoY, but remain flat for TVSL.
• Valuation and view: An improvement in semiconductor supplies is boosting PV wholesales. The demand momentum in CVs is sustaining. Demand for 2Ws hinge on festive sentiment. We prefer 4Ws over 2Ws on the back of strong demand and as it offers a stable competitive environment. We expect momentum in the CV cycle to continue. We prefer companies with: a) 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.