Sector Update | 27 February 2020
Automobiles
BS4 inventory clearance underway for 2Ws/CVs
2Ws awaiting pre-buy | CV inventory largely cleared
Our interaction with leading industry channel partners indicates that BS4 inventory
clearance is underway across segments. Wholesales are expected to decline YoY in
Feb’20 for all OEMs due to the transitory issues for BS6 vehicles and the weak demand
environment. For 2Ws and CVs, inquiries and conversions have remained weak,
whereas for PVs (particularly for MSIL) conversion could have been better but for exit
from diesel. 2W customers continue to delay buying with expectation of higher
transitory discounts. CV sales continued to decline with low demand visibility from
construction activities and financiers playing cautious to avoid risk of unregistered BS4
vehicles. Tractor sales grew marginally due to the upcoming harvest season, but
demand visibility from construction activity remains low.
In Feb’20, wholesale volumes are estimated to decline ~20%/~11%/~35% YoY for
2Ws/PVs/CVs due to stopping of BS4 production. Tractors are expected to grow by
~5.5% YoY.
2Ws: Demand remains weak due to bleak sentiment, absence of expected heavy
discounts on BS4 variants, and confusion among buyers to purchase expensive BS6
variants. System inventory stood at 30-35 days across OEMs, whereas dealers
remained confident on liquidating BS4 stock in anticipation of pre-buy by mid-Mar’20.
We expect wholesales to decline by 7% YoY for BJAUT (20% fall in dom. 2W), 28% YoY
for TVSL and 25% for HMCL, as all OEMs stopped BS4 production in Feb’20. RE volumes
are expected to remain flat at 62.5k with limited supplies of BS4 variants.
PVs: Retail enquires were intact, but conversions were flat due to unavailability of BS4
variants and buyers postponing purchase of BS6 variants. In case of MSIL,
unavailability of diesel variant impacted conversions marginally. Volumes are expected
to decline ~6% for MSIL. Wholesales are expected to decline by ~11% YoY for M&M’s
UV (incl. pick-ups) and by ~23% YoY for TTMT’s PVs as they stopped BS4 production.
CVs: Poor visibility on infrastructure/construction activity and financiers turning
cautious ahead of BS6 transition (to avoid risk of financing an unregistered BS4 vehicle)
kept CV demand weak in Feb’20. Inventory levels have fallen substantially as dealers
focused on clearing BS4 vehicles to avoid unsold inventory. This in turn has resulted in
a substantial drop in discounts. We expect CV wholesales to decline ~32% YoY for
TTMT (-47% for M&HCVs) and ~49% YoY for AL (-59% for M&HCVs).
Tractors: Good demand from the upcoming harvest season but weakness in
construction activities resulted in a marginal improvement in demand across OEMs.
Moreover, low visibility on demand from the infrastructure segment continued to act
as a hurdle in strong demand pullback. We expect tractor volumes to improve ~5% YoY
for M&M and ~6% for Escorts.
Demand has remained muted for 2Ws/CVs in Feb’20, particularly in the run up to the BS6
transition. Sustenance of demand recovery and smooth transition to BS6 hold key to the
stock performance of auto companies. Over the next 12-15 months, our preference lies
with PVs over CVs/2Ws as the segment is likely to (a) be the least impacted by BS6
transition and (b) face lower risk from EVs and competition, in turn reflecting better
earnings growth. Our top picks in autos are MSIL and EIM among large-caps, and AL and
ENDU among mid-caps.
Jinesh Gandhi - Research analyst
(Jinesh@MotilalOswal.com); +91 22 6129 1524
Aanshul Agarawal - Research analyst
(Aanshul.Agarawal@MotilalOswal.com); +91 22 7193 4337
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
27 February 2020
Investors are advised to refer through important disclosures made at the last page of the Research Report.
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