Retail sales have been flat, channel checks indicate. So, wholesale growth has been driven by restocking by dealers ahead of planned price hikes by automakers, say analysts tracking the auto market.
“We forecast healthy wholesale volume growth in Dec 2020. Our dealer checks indicate that post a subdued festive period (Oct-Nov 2020) for two-wheelers, retails will likely decline YoY in December 2020. However, inventory levels are healthy at around six weeks and the low base will likely drive wholesale growth in December 2020,” said Kapil Singh, analyst at Nomura.
He added that rural demand remains strong, and this should continue to benefit tractor demand as inventory levels are low. He also expects registration data to report double-digit growth for December 2020, likely reflecting sales during the festive season.
Nomura sees 21 per cent YoY volume growth in passenger vehicles, while two-wheeler volume is likely to be up 15 per cent. Medium and heavy commercial vehicles (M&HCV) volumes are likely to go down 12 per cent, according to the Japanese broker.
Auto companies from January 1 onwards are likely to release monthly sales data for December.
“M&HCVs are seeing strong demand from the infrastructure segment on the back of resumed government spending on infra, whereas inquiries from haulage are better than last year. Demand for tractors continues to remain strong, with a growth in retails and supplies just meeting demand. Overall consumer sentiment has improved, but the market remains cautious fearing a second Covid-19 wave,” said Jinesh Gandhi, Research Analyst at Motilal Oswal.
Demand for tractors has sustained due to good rabi sowing and preference for farm mechanization. Both M&M and Escorts are operating at full capacity. Sales remains skewed towards higher HP tractors due to high demand from the agriculture segment, say analysts.
In recent months, commodity costs have jumped sharply over. Thus, most automakers have already announced price increases from early Jan 2021. However, there is no clear indication of the quantum. Nomura estimates 2-3 per cent price increases in Jan 2021.
“We believe this will likely further impact demand, especially in the two-wheeler segment, given the already steep price increase after the implementation of BS-VI norms,” said Singh.
With pent-up demand largely met, it would be critical for demand to sustain in 4QFY21 and beyond, considering the expected price hikes as well as opening up of public transport in many parts of the globe, said Gandhi.
The Nifty Bank index has surged over 35 per cent in the last six months. Year to date, it is up over 10 per cent, compared to 15 per cent in Sensex.
“Current valuations suggest the recovery is likely to sustain (our base case), leaving a limited margin of safety for any negative surprises. We prefer companies with higher visibility in terms of a demand recovery, a strong competitive positioning, margin drivers, and balance sheet strength,” Gandhi said.
His preferred picks in the sector are M&M and Hero Moto. Among auto component stocks, he prefers Endurance Technologies and Motherson Sumi. Emkay likes Ashok Leyland (target price: Rs 124), Bharat Forge (TP: Rs 601), Maruti Suzuki (TP: Rs 8,216), Hero Moto (TP: Rs 3,839) and Eicher Motors (TP: Rs3,025).
“M&M remains our top pick in the sector due to the company’s higher rural exposure, where the recovery is faster, its initiatives to address capital allocation concerns, and attractive valuations. We also like Ashok Leyland on cyclical recovery. Among suppliers, we prefer Motherson Sumi, and Minda Industries on strong OE demand recovery and higher content per vehicle,” said Singh of Nomura.