Auto Sector Q2 Preview: Festive season to aid volumes ahead

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The automobile sector has been languishing in the market for a long time, but is it out of the woods now? Well, the last two years have been a roller coaster one for the sector beginning with the Covid-led lockdowns leading to nil sales in April 2020,  numerous supply chain disruptions, the second wave, growing inventory concerns and then the semiconductor shortage. Here’s what the second quarter earnings may look like for the sector.

Volume Growth 

Volume performance for the sector in Q2 was in line with expectations, with robust growth in CVs while growth was muted in other segments. CV volumes have been aided by healthy freight availability.

Domestic two-wheeler volumes were weak, but exports were healthy due to better demand. Domestic volumes were notably lower due to a high base last year on account of inventory filling. In addition, chip shortages had affected dispatches for premium motorcycles.

On the other hand, domestic passenger vehicles industry volumes had declined sharply by over 50% owing to severe chip shortages.

Domestic tractor volumes were weak as well due to a high base and delayed harvesting in certain parts of the country due to above normal rainfall.

Brokerage house Emkay in its report said, “Chip shortages are expected to persist in Q3FY22, but supplies are expected to improve in a staggered manner.”

Company Outlook

For the largest car maker, Maruti Suzuki, Q2FY22 volumes declined 3%, with domestic PV seeing the biggest hit. Brokerage houses believe that volumes are expected to improve (MoM), owing to better semiconductor supplies, but are expected to remain below normal levels.

For Mahindra & Mahindra,  total volumes grew 3%. In the farm segment, brokerage house Emkay expects domestic volumes to remain muted on a high base and lower government subsidies.

For tractor major, Escorts, total volumes declined by 14% to 21,073 units. Brokerage houses expect the high base in H2 and lower government subsidies to result in lower volumes in FY22.

Ashok Leyland on the other hand, witnessed a 42% rise in total volumes to 27,543 units.

Emkay Global in its report had said, “We expect robust double-digit growth (35%+) in FY22, supported by improving macros, government thrust on infra spending and some improvement in replacement demand.”

In two-wheelers, Eicher Motors – Royal Enfield Q2FY22 total volumes declined 18% to 1,23,427 units. The volume decline was due to severe chip shortages. However, order bookings are strong with the launch of new generation Classic 350cc. Led by an improvement in chip supplies, volumes are expected to improve gradually in coming months.

For Bajaj Auto and for TVS Motor, brokerage houses believe,  the domestic demand is likely to recover, supported by the upcoming festive season.

Sector Outlook

Brokerage houses believe, the auto sector to report an in-line performance with street expectations. The upcoming festive season and some improvement in chip supplies is likely to support volumes ahead.

“We retain a positive view on the auto sector and our top picks are Tata Motors, (TP: Rs 400), Ashok Leyland (TP: Rs 155), Maruti Suzuki (TP: Rs 8,600) and TVS Motor (TP: Rs 780). In Auto Ancillaries, we like Motherson Sumi (TP: Rs 300) and Bharat Forge (TP: Rs 920)”, said Emkay Global in its report.