Hit hard by the coronavirus outbreak, auto manufacturers are now struggling with a chip shortage that has hit production, leading to a 37 percent drop in September volumes of nine companies that control 95 percent of India’s passenger vehicle market.
These nine companies reported domestic sales of 167,871 units in September compared to 265,702 vehicles in the year-ago period.
India’s largest automaker Maruti Suzuki recorded a 57 percent drop in domestic wholesale passenger vehicle (PV) volumes in September to 63,111 as against 147,912 units in the year-ago period.
Tata Motors, the country’s third-largest carmaker, was an outlier, seeing a growth in sales. The Mumbai-based company sold 18 percent more petrol- and diesel-powered cars in the month at 24,652 units as against 20,891 vehicles in September 2020.
Sales of utility vehicle specialist Mahindra & Mahindra (M&M) slipped 12 percent to 13,134 units against the year-ago figure of 14,857.
Here's how brokerage houses foresee the performance of auto companies:
Motilal Oswal
Two-wheeler (2W) and commercial vehicle wholesale numbers were above our estimate, passenger vehicle and three-wheeler (3-W) numbers disappointed and tractors were in line.
September 2021 saw the worst supply chain challenges, which affected wholesales for PVs and premium 2Ws, though the situation is expected to gradually improve from October.
Though two-wheeler numbers were above our estimates and were up 13 percent MoM, they declined 16 percent YoY. Wholesales were driven by inventory filling for the upcoming festival season as OEMs are cautiously optimistic. Inventory stands at 45-60 days.
The semiconductor shortage is expected to continue in 2HFY22, though there would be an improvement in supplies from the lows of September 2021, resulting in a potential earnings downgrade to our FY22 estimates.
We prefer 4Ws over 2Ws as PVs are the least impacted segment currently and offer a stable competitive environment.
We expect the CV cycle to recover and gain momentum towards 2HFY22E. We prefer companies with higher visibility in terms of demand recovery, a strong competitive positioning, margin drivers and balance-sheet strength.
Maruti and Tata Motors are our top OEM picks. Among auto component stocks, we prefer Bharat Forge and Apollo Tyres.
Emkay Global Financial Services
The volume performance in September was in line with expectations, with robust growth in commercial vehicles and muted growth in other segments. Domestic CV volumes were robust, aided by better freight availability and rates.
The upcoming festival season and some improvement in chip supply are likely to support volumes.
Overall, we retain a positive view on the auto sector and our top picks are Tata Motors with the target of Rs 400, Ashok Leyland with the target of Rs 155, Maruti Suzuki with the target of Rs 8,600 and TVS Motor with the target of Rs 780.
In ancillaries, we like Motherson Sumi Systems with target of Rs 300, Bharat Forge with target of Rs 920 and Apollo Tyres with target of Rs 305 per share.
LKP Research
The base month of September 2020 marked a rapid revival in almost all sectors barring CVs. In FY 22, after the much more intense second Covid wave in April and May, rural markets are still reeling and are taking time to recover. Therefore, over a high base of last year and low demand this year, rural-based tractors and two-wheelers segments are showing slower growth.
Despite a weak September, we expect a decent FY 22 on a very low base of H1 FY21. Given a very healthy double-digit growth in YTD FY22, we believe the impact of the second wave will be mitigated, mainly for CVs.
Two-wheelers and tractors may post a mid-single-digit growth in FY 22, while PVs and CVs are expected to grow close to 10 percent and 20-25 percent, respectively. Therefore, FY 22 is expected to be better than FY 21, provided there is no third COVID wave.
We prefer Bajaj Auto in the 2Ws, as its growth is well driven by exports and 3Ws, while on the PV side, we like Maruti, as an expected revival in supply should drive PV demand.
We like Mahindra & Mahindra because of its thrust on rural markets through its leadership in tractors business, prudent capital allocation and a robust growth strategy.
We like Ashok Leyland within CVs as it has a diversified revenue base deriving from light commercial vehicles (LCVs), defence, medium and heavy commercial vehicles (MHCVs) and spares.
Tata Motors is seeing a strong PV business, along with a very healthy revival in MHCVs. Every dip in these stocks in the short term is a good opportunity for investors to enter into them from the medium to long-term perspective.
IDBI Capital
In September, the Indian auto industry struggled to recover from sluggishness. The PV segment reported a drop in volumes primarily due to semiconductor shortages, though demand remained stable.
The domestic 2W market continues to exhibit weakness as the industry struggles to recover from lockdowns. The tractor segment reported a drop in volumes due to a higher base effect and uneven distribution of rain.
CVs reported volume recovery due to a lower base, higher infra spending and increased freight movement across India.
We believe that the auto industry is set to report double-digit volume growth in FY22, on account of a low base, all-time-low interest rates and increasing demand for personal mobility.
Vaccination has picked up strongly and is expected to bring in incremental normalcy in the urban areas, helping the auto market to recover.
Uneven rainfall may influence the rural market in the near term. The risk of a third COVID wave, semiconductor shortages and regional lockdowns remains in near-term risks.
We expect the auto market to remain soft during the third quarter. We remain positive on PV and CV markets but are cautious on two-wheelers.
