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2021 Auto Sector Outlook: Expectations of strong recovery priced in, says ICICI Securities

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The COVID-19 pandemic hit the automobile sector hard as mobility needs were constrained in the first half of CY2020 due to lockdowns. However, the H2 was a story of pent-up demand release and growing industry optimism.

2021 Auto Sector Outlook: Expectations of strong recovery priced in, says ICICI Securities
The COVID-19 pandemic hit the automobile sector hard as mobility needs were constrained in the first half of CY2020 due to lockdowns. However, the second half was a story of pent-up demand release and growing industry optimism.
As we move into CY21, ICICI Securities forecasts strong double-digit industry growth aided by the base effect of H1CY20 while assuming a continuation of more of the same trend, which is, the rural outperforming urban.
“A better winter crop harvest under the rising commodity price environment is likely to benefit rural cashflows. Rebound in infrastructure activities in rural markets could also lend a fillip to ancillary income streams for households, hence the relative preference for more rural-facing auto segments, viz. tractors and 2Ws vs PVs,” ICICI Securities said in a report.
Source: ICICI Securities report
The brokerage house expects urban PV demand to remain more skewed towards the ‘uptrading existing vehicle’ theme with SUVs continuing to grow in terms of volume/revenue contribution.
Commercial segment demand is likely to undergo the sharpest rise as economic activity normalisation would increase the need for freight carrying capacity.
On the consumer side, it believes COVID has prompted rapid digital adoption, which is unlikely to reverse easily. Thus brand interactions with customers, whether virtual product launches or virtual vehicle selling, has become a quintessential requirement.
“This is likely to act as a pivot towards leaner and more customer service oriented dealership franchises with reduced need for excessive physical presence. Rise in finance penetration and a well incentivised scrappage policy could be potential levers to keep prices of 2Ws and the demand-challenged CVs under control,” the brokerage house said.
However, the sector valuations currently remain relatively expensive on a forward basis even as consensus expectations factor-in FY18/FY19 peak industry dynamics to reflect back in FY23, it said.
Going ahead, the key upside risk would be better-than-expected volume recovery while downside risk would be margin decline amidst rising input costs.
ICICI Securities has listed out top-8 focus trends for CY21. These are:
  1. ‘Premiumisation’ continues to be in play; ‘scooterisation’ expected to revive in CY21
  2. Rural again continues to drive aggregate demand
  3. Scrappage policy, freight demand increase could act as triggers for M&HCV industry
  4. North and East regions continue to do well as mobility normalization happens
  5. Consumer sentiment remains modest amidst continued unemployment worries
  6. Competitive intensity likely to remain elevated (discounts and new launches) even as rising input costs potentially dent margins
  7. Rising finance penetration with lower interest rates to smoothen monthly wallet impact
  8. Tractor sales growth trends to remain positive, but expectations also remain high
  9. Market Movers

    CompanyPriceChange%Loss
    Adani Ports825.70 -21.05
    SBI Life Insura986.15 -11.40
    SBI428.05 -4.20
    Divis Labs4,331.15 -41.40
    ICICI Bank634.45 -5.95
    CompanyPriceChange%Loss
    SBI428.00 -4.25
    ICICI Bank634.50 -5.65
    IndusInd Bank1,015.00 -8.65
    Axis Bank737.40 -6.15
    Larsen1,506.40 -12.65
    CompanyPriceChange%Loss
    Adani Ports825.70 -21.05 -2.49
    SBI Life Insura986.15 -11.40 -1.14
    SBI428.05 -4.20 -0.97
    Divis Labs4,331.15 -41.40 -0.95
    ICICI Bank634.45 -5.95 -0.93
    CompanyPriceChange%Loss
    SBI428.00 -4.25 -0.98
    ICICI Bank634.50 -5.65 -0.88
    IndusInd Bank1,015.00 -8.65 -0.85
    Axis Bank737.40 -6.15 -0.83
    Larsen1,506.40 -12.65 -0.83

    Currency

    CompanyPriceChng%Chng
    Dollar-Rupee73.06000.00750.01
    Euro-Rupee88.98000.06100.07
    Pound-Rupee103.4970-0.0650-0.06
    Rupee-100 Yen0.6676-0.0002-0.04