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As demand points to recovery, auto makers brace for speed

As demand points to recovery, auto makers brace for speed

As demand points to recovery, auto makers brace for speed
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By Ankit Gohel  Jul 2, 2020 2:23:19 PM IST (Published)

The retail demand is recovering due to preference for personal vehicles over shared mobility and a rural recovery.

After a long period of coronavirus-induced lockdown, the automobile sector is bracing for a shift in gear. The release of June sales data points to a demand recovery, and carmakers, are set to gain speed.

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The retail demand is recovering due to preference for personal vehicles over shared mobility and a rural recovery. However, there are supply-side constraints, said a Motilal Oswal report, adding that OEMs are trying to catch up with the increasing demand.
Tractor sales are seeing growth on strong rural demand while commercial vehicles (CV) are the hardest hit due to slowing economic activities. Passenger vehicle (PV) volumes declined 48 percent, while two-wheeler (ex-Bajaj Auto) volumes were most resilient with a minimum decline of around 29 percent. CV volumes (for Q1FY21) plunged around 89 percent, YoY, brokerage Motilal Oswal said in the report.
Demand recovery in the two-wheeler segment was largely driven by a preference for personal vehicles over public transport and high disposable income in the rural market due to a good harvest.
PV sales declined around 48 percent, YoY, however, the segment witnessed recovery on the back of entry-level vehicles as a preference for personal mobility spurred pent-up demand. Retail sales were stronger than wholesales and were impacted by supply-side issues, the report said.
Meanwhile, CVs were the worst hit, with sales falling 89 percent YoY in Q1FY21 due to a decline in economic activities and BS4 pre-buying.
Medium & heavy commercial vehicle volumes plummeted 92 percent YoY while light commercial vehicle volumes plunged 87 percent YoY, the report noted
“While demand recovery has surprised everyone, sustenance remains a key monitorable. With multiple moving parts in the form of normalization of supply-side, consumer sentiment, availability of finance, and impact of BS6 cost inflation, demand normalization is the biggest monitorable,” Motilal Oswal said.
The valuations are reflecting recovery from H2FY20, leaving a limited margin of safety for any negative surprises, it added. Hence, the brokerage prefers companies with higher visibility in terms of demand recovery, a strong competitive positioning, margin drivers, and balance sheet strength.
The brokerage picks Mahindra & Mahindra and Eicher Motors among large-caps while Motherson Sumi among mid-caps.
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