CLSA has red-flagged the automobile sector's performance, particularly the two-wheeler segment, in light of slowing demand amid rising input costs. The global brokerage expects the two-wheeler segment to underperform other automotive segments. It also believes the rapid rise in commodity prices will pressure the segment margin and may struggle to choose between the OEMs and the customer affordability (volume).
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The brokerage also points to recent data on two-wheelers sales, which suggests weakening momentum (especially in entry-level motorcycles).
CLSA does not expect the two-wheeler segment to reach its FY19 peak even by FY23. It forecasts two-wheeler segment volume CAGR in FY21-23 of 14 percent.
It has cut its FY22/23 industry volume forecasts by 1-3 percent primarily led by a 4 percent cut in its motorcycle volume forecasts.
“Our channel checks indicate that pent-up demand is largely behind us. In addition, demand from segments such as high school and college students as well as urban semi-skilled professionals (retail, hospitality and small traders) continues to be pushed forward,” CLSA said in a note.
The brokerage expects rural demand to perform relatively better than urban but the trends during the April and May wedding season need to be eyed.
“We would highlight that rural demand did not materially outperform urban demand in FY21 (unlike the past few years). Registrations at semi-urban/rural RTOs declined 31 percent YoY in FY21 compared to a 34 percent decline for urban RTOs,” CLSA said.
Further, commodity costs are also likely to put pressure on Q4FY21 and FY22 margins of the two-wheeler manufacturers.
CLSA forecasts Q4FY21 Ebitda margins to decline by 70-220 bps QoQ and expects FY22 margins to be slightly lower than Q4FY21.
“While every OEM is raising prices to offset commodity inflation, we believe there will continue to be a gap for the next few quarters. 2W affordability has been adversely impacted over the past three years due to regulatory changes (insurance, safety and emissions). OEMs may have to soon start prioritising between volume and profitability if the demand environment remains soft,” CLSA said.
Among stocks, CLSA has downgraded its ratings on Hero MotoCorp to Underperform and cut its target price to Rs 3,040 per share from Rs 3,610 earlier as it believes that the company’s wholesale and retail market share gains have begun to taper as the entry/executive motorcycle segments have started to underperform other categories.
The brokerage also downgraded Bajaj Auto to Underperform and cut the target price to Rs 3,750 per share from Rs 3,915 earlier. While exports are doing relatively better for Bajaj, it will likely face headwinds in domestic two-wheelers and three-wheelers, CLSA said.
CLSA has upgraded Eicher Motors to Underperform with an unchanged target price of Rs 2,450 per share as the company’s wholesale and retail market share have begun to improve as premium segments have started to outperform.
It maintained outperform recommendation on TVS Motor Company with an unchanged target price of Rs 600 per share as the brokerage is of the view that TVS has been consistently gaining market share in the domestic market and is performing better in exports.