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: