Auto sector negotiates December hurdles, gears up for fast lane in Q4

Seasonally, Q4 is a strong quarter for the sector. PV and M&HCV segments to maintain their strong performance while the improving farm sector will aid pickup in tractors and farm implements. Two-wheeler demand to improve due to upcoming marriage and festive season

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The Indian auto sector went on a low gear in December across most segments both on a yearly as well as on a sequential basis. Data from VAHAN portal shows that the new vehicle registrations fell back to the pre-festive period levels that were achieved in the July-September period.

One of the major reasons for the tepid growth was the high base of December 2021, which showed marked improvement on the back of pent-up demand after the pandemic. Therefore, the two-wheeler (2W) segment reported muted growth in the domestic markets.

Even the exports markets have been showing depressing trends over the past few months and which continued in December too. Exports have been severely impacted due to a fall in local currencies amid rise in the US dollar.

The demand for passenger vehicles (PV) also skidded in the last month of the year due to seasonality (people tend to wait for the year of manufacturing to change). The segment was also impacted to a certain extent due to semi-conductor shortage which impacted the production of some models and also due to the production shutdowns because of bi-annual maintenance.

Medium and heavy commercial vehicles (M&HCVs), however, presented a silver lining with resilient performance on a sequential basis, aided by strong underlying parameters. Seasonally, Q4 is the strongest quarter for commercial vehicle sales. The growth in sales of light commercial vehicles, however, was lower due to high base.

Tractors segment has been reporting unstable growth over the past few months. In the month of December, tractor retails remained stable in a narrow band with monthly and seasonal volatility being in line with expert’s expectations at the wholesale level.

Read: Car sales surge to a record in 2022 on year-end boost

Outlook for Q4FY23

Despite the tepid performance in December, experts are confident that the growth will bounce back in January and the sector will post a strong performance in the last quarter of the current financial year. Seasonally too, Q4 is a strong quarter for the sector.

The growth in the PV segment will likely be driven by strong demand for recently launched models as well as the expected strong response to the models that are lined for launches during the quarter.

“We believe the fourth and the last quarter of the year to witness stronger growth in the PV segment as the chip shortage issue eases further and new launches on both internal combustion engines (ICE) and electric vehicles (EV) sides do take place”, said a note from the brokerage firm LKP Securities Ltd.

2Ws shall further gain strength on low base of last year, and also due to the fact that the domestic inventory destocking seems to have come to an end with wholesale trends largely converging with retail trends on MoM basis.

“The 2W segment is also likely to pick up at the back of new EV launches and good monsoon leading to better rural demand on the back of solid Rabi crop”, said the analysts at LKP Securities.

The good run is likely to continue for CVs while the demand for tractors should pick up now on good monsoon, strong Rabi season and improvement in the rural economy. M&HCVs have a strong correlation with GDP growth, vehicle financing and replacement demand. With all these being favourable, experts expect strong growth in M&HCV sales in the coming months.

“We are upbeat about FY23, with expected YoY volume growth of 32 percent for CVs, 27 percent for PVs, 16 percent for 2Ws, and 7 percent for Tractors”, said a note from Emkay Research.

Preferred stocks

Experts are bullish on Hero Motocorp in the 2-W space, Mahindra and Mahindra (M&M) in the PV/UV & tractors segment while Ashok Leyland is the preferred bet in the CV segment.

“We like Hero Motocorp as we believe it is almost free from the exports weakness and is also led by strong monsoons barring a few eastern states, improvement in rural economy and upcoming EV launches”, a note from LKP Research said.

The brokerage firm, Motilal Oswal Financial Services has a ‘buy’ on the stock with a target price of Rs 3,000 per share. The stock currently trades at 19.7x/15.1x FY23/FY24 EPS.

The company expects the demand to pick from the current quarter due to the upcoming marriage and festive season in many parts of the country and continuously improving consumer sentiment on account of favourable macro-economic indicators.

Experts prefer M&M because of its thrust on rural markets through its leadership in tractors business, prudent capital allocation and a robust growth strategy in UVs, EVs and CVs. The company witnessed 61 percent YoY growth in its PV business and 45 percent overall growth.

Rabi crop sowing has been strong and is higher than last year acreage and also higher than the average of last five years. Wheat and oil seeds are also expected to see bumper harvest. The company expects the demand for tractors and farm implements to see an uptick at the back of strong Rabi sowing, good kharif procurement and likely exports of wheat.

According to the brokerage Motilal Oswal, the stock trades at a core PE of 11.4x FY24E EPS and 2.1x core P/B. It maintains a ‘buy’ on M&M with a target of 1,470 per share.

In the CV segment Ashok Leyland is the most preferred stock. “We like Ashok Leyland within CVs as it has a diversified revenue base deriving from LCVs, Defense, M&HCVs, exports and spares”, said the analysts at LKP Research.

Its M&HCV volumes grew 61 percent YoY to 12.3K units, outperforming its peers.

“We estimate volumes to grow 41 percent in FY23 and the stock trades at 11.4x FY24E EV/EBITDA and 4.7x FY24E P/BV”, a note from Motilal Oswal said. It maintains a ‘buy’ on the stock with a target price of Rs 180 per share, implying an upside of ~20 percent from current levels.

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