The recovery in demand for the automobile sector seen in the month of June seems to have sustained in the seasonally slow month of July as well. There have been mixed sentiments of optimism and uncertainty surrounding the noise of the third COVID-19 wave in the auto industry.
The current demand situation represents initial signs of recovery. While there is negative sentiment due to the fear of a third COVID-19 wave, this seems to have had a higher impact on two-wheelers than passenger vehicles (PV).
"Inquiry levels for PVs have improved and are expected to convert to bookings once the inauspicious period is behind. Two-wheelers is still a laggard. Tractor demand has seen a seasonal decline. Commercial vehicles (CV) recovery has also been slower," domestic brokerage Motilal Oswal said in a report.
During the month of July, PV demand was boosted by wage revisions for government employees, while 2W demand recovery was very slow. M&HCV demand is expected to recover towards the end of the September quarter as the Infrastructure segment is seasonally slow due to the monsoons and cargo is impacted by low freight availability, the report added.
Meanwhile, tractor demand has also eased due to seasonality, and commercial demand is picking up gradually.
Two-wheeler wholesale volumes are estimated to see 14 percent YoY growth and reach July 2019 levels, while CVs are likely to decline marginally by 2 percent on a two-year CAGR. LCV would come in flat on a two-year CAGR, while M&HCV would post a 6 percent CAGR decline.
PV and tractor are the only segments to report higher volumes versus July 2019 levels, as per the report.
Meanwhile, e-Scooters (TVS iQube, Bajaj Chetak) are slowly receiving inquiries after incentives were offered by the government through various electric vehicle (EV) policies.
Demand momentum is building up gradually post the reopening in the month of June 2021, with varied recovery visible across segments. "Current valuations largely factor in sustained recovery, leaving a limited margin for safety for any unexpected disappointments," Motilal Oswal said.
The brokerage prefers 4W over 2W as PV is the least impacted segment currently and offers a stable competitive environment. It expects the CV cycle to recover and gain momentum towards H2FY22.
"We prefer companies with higher visibility in terms of demand recovery, a strong competitive positioning, margin drivers and balance sheet strength," it said.
Maruti Suzuki India and Mahindra & Mahindra (M&M) are its top Original equipment manufacturer (OEM) picks. Among the auto component stocks, the brokerage prefers Bharat Forge and Endurance Technologies.