On recovery path, auto sector rides rough

The tremors are understandable. For one, the Ukraine war has ignited the prices of commodities including crude oil and aluminum, both of which have an impact on the automobile sector. So rising cost is a matter of concern. Nomura Financial Advisory & Securities (India) Pvt. Ltd. in a report on March 1. One basis point is 0.01%. PV and 2W refer to passenger vehicles and two-wheelers respectively. Hence, we feel that further price hikes may be required in Q1FY23F to support margins in terms of the current trend. persists,” the brokerage said.

Besides, it’s not like February’s volume numbers are inspiring. PV and Commercial Vehicles (CV) performed well, but 2W and Tractors showed no signs of recovery. The easing of the semiconductor crisis along with high demand for personal mobility aided the PV segment. In February, Mahindra & Mahindra Ltd (M&M) domestic PV volumes grew by 80% year-on-year (YoY), helped by utility vehicle sales. Tata Motors Limited’s domestic PV sales grew 47% year-on-year. Maruti Suzuki India Ltd’s domestic PV volumes declined by 7.5% year-on-year, but exports at an all-time high meant a reduction in overall volumes.

Meanwhile, a higher base and muted rural demand meant tractor volumes of M&M and Escorts Ltd declined by 27% and 46%, respectively. TVS Motor Co. Ltd, Hero MotoCorp Ltd, and Bajaj Auto Ltd declined 11%, 32% and 35% respectively in domestic 2W volumes. Bajaj’s sharp decline is on account of semiconductor shortages as a major supplier faced severe shortages. Better exports partly made up for the domestic decline in 2W.

CVs are at a good level. “The growth in the CV segment is mainly on account of a cyclical uptick. The segment is witnessing high replacement demand. Demand is likely to continue as economic activity picks up and infrastructure spending increases.”

It is true that the growth in rural cash flow is particularly good for 2W on the expectation of a good rabi crop. However, higher Brent crude prices (over $110 a barrel at the time of printing) would mean an increase in cost of ownership and this is a risk for 2W. Nomura said, “We believe a slowdown in large-scale consumption is a significant risk as we move into FY23F, especially for 2Ws and entry segment cars, as oil prices are expected to rise in March.” ” “Freight rates for automakers will increase, which will put a strain on margins,” Baksi said in this context.

What’s more, the semiconductor crisis is likely to worsen due to ongoing geopolitical tensions. “Ukraine supplies the specialty gases needed for the chip-making industry. Thus, tensions are likely to expand in the supply chain of semiconductors, which are critical to the manufacturing of autos and other electronic components in the Asia-Pacific region,” According to a report by Moody’s Analytics.

On the other hand, there may be an accelerated conversion to electric vehicles (EVs) following an increase in retail fuel prices. In February, Tata Motors reported a year-on-year growth of 479% in EV volumes, but remained flat sequentially. “Despite supply constraints, EV 2W sales continued to grow (~3.3% in February versus 2.7% in January). We expect the EV mix to pick up further on March 22.”