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Demand for two-wheeler and passenger vehicles returning; long road ahead for CVs

Demand for two-wheeler and passenger vehicles returning; long road ahead for CVs

Demand for two-wheeler and passenger vehicles returning; long road ahead for CVs
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By Ankit Gohel  Jun 1, 2020 7:24 PM IST (Published)

As the Indian automobile industry has restarted operations partially, a gradual recovery for the sector is expected from the second half of FY21 after witnessing almost zero sales in April due to the complete lockdown. There is a resurgence in inquiries seen for two-wheelers and passenger vehicles (PV) but the commercial vehicle (CV) segment is seeing negligible demand, a report said.

As the Indian automobile industry has restarted operations partially, a gradual recovery for the sector is expected from the second half of FY21 after witnessing almost zero sales in April due to the complete lockdown. There is a resurgence in inquiries seen for two-wheelers and passenger vehicles (PV), but the commercial vehicle (CV) segment is seeing negligible demand, Motilal Oswal said in a report.

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“While demand for two-wheelers and PVs is seeing some recovery from semi-urban and rural markets, CVs have minimal demand due to low economic activity and cautious financiers as many operators have already opted for moratorium. Also, financiers currently are stringent and highly risk averse in lending to CVs or three wheelers,” the report by the brokerage firm read.
The near-term demand outlook for the auto sector is weak as analysts see a gradual restoration of normalcy post lifting of the lockdown.
In May, the brokerage estimates wholesale volumes to decline around 77 percent for 2-wheelers, 77 percent for PVs and 90 percent YoY for CVs due to the lockdown and low demand. Tractors volumes are expected to decline by around 71 percent, YoY.
It expects gradual recovery from H2FY21, which should be led by the festive season.
“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 in 2HFY21 is the biggest monitorable,” the brokerage house said.
For April 2020, most OEM plants were operating at less than 30 percent average utilisation while less than 50 percent dealer outlets were operational (except tractors which had 60-70 percent operational dealerships).
The report suggests that demand for two-wheelers is returning, driven by a preference for personal vehicles rather than public transport, and higher disposable income in rural markets due to good harvest. While this could be an initial spurt in demand, sustenance of the same is a key monitorable.
Sales of passenger vehicles have recovered slightly post the gradual lifting of lockdowns largely due to the conversion of pre-lockdown bookings, the report said.
The CV segment is the hardest hit due to low economic activities. Channel checks done by Motilal Oswal Financial Services suggest that MHCVs have seen marginal demand only from the construction segment and are not expected to recover before the festive season. This is due to BS4 pre-buying in 4QFY20, price hike of 16-18 percent on BS6, depressed fleet utilization, and stringent financing norms.
The brokerage CV wholesales to decline 91 percent for Tata Motors and 92 percent YoY for Ashok Leyland.
The Tractor segment was better off than others due to good Rabi harvest, robust reservoir levels and forecast of normal rains supporting demand along with comparatively relaxed lockdown norms, which has supported supply, the report added. It expects tractor volumes to decline 70 percent YoY for M&M and 75 percent for Escorts due to supply-side constraints.
“Valuations appear attractive across companies, but given the uncertain macro environment and threat of the possible prolonged impact of Coronavirus, we prefer stocks offering higher visibility of demand recovery, better competitive positioning, scope of higher operating leverage and strong balance sheet,” the brokerage said.
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