Home » Battered by headwinds, auto trade sees silver lining in passenger, business autos

Battered by headwinds, auto trade sees silver lining in passenger, business autos

Battered by headwinds, auto industry sees silver lining in passenger, commercial vehicles

© Sundeep Khanna
Battered by headwinds, auto trade sees silver lining in passenger, business autos

The Indian auto trade continues to be hit by components past its management. From COVID-19 to the Russia-Ukraine struggle, the trade has discovered the going robust over the past two years.

The issue began when the primary COVID-19 wave led to the countrywide lockdown in late March 2020. Because the scenario improved, the sector noticed strong offtake attributable to pent-up demand however a devastating second wave and the accompanying provide chain disruptions, which triggered a world scarcity of semi-conductors, once more nipping the demand revival within the bud.

Chip scarcity continues to be an issue for the unique tools producer (OEMs), stopping them from reaching full capability utilisation even because the demand continues to be robust.

The Russia-Ukraine struggle has dented sentiment and will end in an extra delay within the revival of fortunes of the beleaguered sector.

The Ukraine disaster

The auto trade has been witnessing weak spot on account of a number of headwinds.

The Russia-Ukraine struggle and the sanctions towards Moscow have led to a spike in commodity costs following worries over provide disruptions. The crude has been touching new highs and no respite appears to be in sight

“Whereas sharp rise in commodity value would damage margins, possible improve in gasoline costs (15-20 %) publish the state election outcomes can lead to demand deferment throughout board,” mentioned Sneha Poddar, AVP Analysis, Broking & Distribution, Motilal Oswal Monetary Providers.

“There are fears of semiconductor chip provides getting adversely impacted as Russia and Ukraine are essential sources of noble gases and valuable metals utilized in manufacturing of semiconductors,” she mentioned.

Shortages might additional derail chip provides and proceed to affect passenger autos (PVs), premium 2-wheelers (2Ws) and business autos (CVs), negatively.

Darshan Gangar, Analysis Analyst, Axis Securities concurred with Poddar and mentioned, “Just a few pockets of the auto trade, particularly home 2Ws and tractor segments, have been struggling a lot earlier than the rise in crude costs, owing to gentle demand, which has failed to select up”.

What’s going proper?

The passenger and business automobile segments have seen comparatively strong demand, which is more likely to maintain regardless of a number of challenges.

“Within the PV area, however the near-term supply-related challenges, demand outlook is enhancing with the desire for private mobility, whereas new launches have additionally met with robust shopper sentiments,” mentioned Sanjeev Hota, Head of Analysis, Sharekhan by BNP Paribas.

On the CV aspect, the expansion outlook is supported by the general financial restoration led by the development and infrastructure sectors.

Sreeram Ramdas, Analyst at Inexperienced Portfolio, mentioned the headwinds had been non permanent and the brand new capex within the semi-conductor area would change the equation and assist ease the chip scarcity within the subsequent couple of quarters.

“What steers the home auto sector of any nation is basically the inhabitants and their earnings and knowledge reveals that solely 20 in a 1,000 individuals personal a automobile in India,” Ramdas added.

Contemplating India is projected to have the fastest-growing center class on this planet, and the fastest-growing economic system, the auto sector stands to achieve.

“Premiumisation of demand, rising per capita earnings and powerful demand even from non-metro cities are large positives for the sector,” mentioned Arun Malhotra, Founding Associate & Portfolio Supervisor at CapGrow Capital Advisors.

What’s not proper?

Costs of the commodities related to the auto trade have gone up by round 15-50 % over H2CY21 common.

The benchmark Brent crude has additionally surged to $130 a barrel following the US determination to ban Russian crude oil and Britain’s determination to part out Russian vitality imports by the tip of 2022.

“Each these components would exert stress on the profitability and demand of OEMs, whereas sharp inflation in crude oil and rubber will additional worsen under-recoveries and delay in margin restoration for the tyre gamers,” mentioned Poddar.

Auto part gamers with sizeable EU operations will see the complete affect of hyper-inflation in vitality prices in H1CY22. A 100% leap within the costs of nickel over the previous few days threatens to disrupt manufacturing of batteries for electrical autos.

“The approaching gasoline worth hike after elections and anticipated rise in third-party motor insurance coverage premiums would seemingly worsen the scenario additional as a possible improve in gasoline costs will doubtlessly result in demand deferment throughout segments,” mentioned Gangar from Axis Securities.

Is it time to go overboard on auto shares?

The BSE Auto Index touched its peak of 26,814.26 on January 17, 2022 however has since fallen 19 % (until March 8). The auto sector underperformed broader market indices.

So, does it make sense to spend money on auto shares?

“It’s by no means smart to catch a falling knife at one go, be it when it comes to earnings or market cap,” mentioned Basudeb Banerjee, Analysis Analyst, ICICI Securities.

FY23 profitability is more likely to get eroded considerably, if current commodity value ranges maintain for six extra months.

“Thus, wanting into potential margin revival from H2FY23 and unchanged outlook on demand and margins for FY24, it’s time to add shares in tranches and concentrate on performs with lean steadiness sheet,” added Banerjee.

The correction in auto shares has resulted in softening of their valuations and traders can discover worth in these shares.

From an funding perspective, “after the numerous beneath efficiency, valuation is popping beneficial in sure pockets of automotive worth chain however we wish to put our guess on PV and CV area, because the demand outlook is extra affordable on this area as in comparison with others,” mentioned Hota of Sharekhan by BNP Paribas.

The CV trade is on the cusp of an up-cycle, supported by the federal government’s push on infra, pick-up in financial actions and strong last-mile connectivity and substitute demand.

The demand for the PV trade, too, has remained resilient over the past yr, which is mirrored within the robust order ebook and excessive ready interval for all of the OEMs.

“Publish the latest inventory worth correction within the general auto area together with main headwinds and unfavorable sentiments already priced in, one can use the ‘buy-on-dips’ technique to accumulate high-quality shares buying and selling at enticing valuations,” mentioned Gangar from Axis. His prime picks are Ashok Leyland, Maruti Suzuki and Bajaj Auto.

Disclaimer: The views and funding ideas of funding specialists on Moneycontrol.com are their very own and never these of the web site or its administration. Moneycontrol.com advises customers to examine with licensed specialists earlier than taking any funding selections.