The Indian automobile industry is undergoing a shape-shifting recovery, as evidenced by September’s wholesale volume numbers. Sequentially, the pre-festival channel filling drove volumes in the Passenger Vehicle (PV) and Two-Wheeler (2W) segments. However, within the segments, the development differed in different categories.
In PV, expensive utility vehicles are stealing the show. In September, domestic volumes in the mini, compact and mid-size segments of Maruti Suzuki India Limited grew 8.3% sequentially, while utility vehicle volumes grew by around 21%. A similar trend was seen in July and August also.
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Compared to pre-Covid (September 2019) levels, PV makers like Maruti, Tata Motors Ltd and Mahindra & Mahindra Ltd (M&M) saw a significant increase in last month’s volumes.
In 2W, premium vehicles continue to gain momentum. Barring Bajaj Auto Ltd, other listed 2W companies posted sequential growth. Here, Eicher Motors Ltd’s 17% sequential growth in Royal Enfield domestic volumes was higher than Hero MotoCorp Ltd’s 12.6% growth in 2W volumes.
Royal Enfield’s September volumes have grown by almost 34% against pre-Covid levels. Hero Moto primarily operates in the entry-level 2W segment and its September volumes are lower than the pre-Covid levels. On the other hand, TVS and Bajaj Auto, which have premium vehicles in their portfolio, have registered growth of around 17% and 26% as compared to September 2019.
Overall, the PVs are showing increased traction compared to 2W, indicating a K-shaped recovery. The demand environment for 2W continues to remain sluggish due to weak rural sentiment. Kumar Rakesh, an automobile and technology analyst at BNP Paribas Securities India, said, “The price hike in the 2W segment has surpassed earnings growth, which depends on affordability.”
However, tractors have not seen that kind of price hike and the September volumes of this segment surprised positively. M&M and Escorts Kubota Ltd.’s total tractor volumes grew by 126.4% and 100.2%, respectively. This compares with Motilal Oswal Financial Services’ estimates of growth of around 88 per cent and 50 per cent.
“Demand in the tractor segment was strong in September. The tractor demand is likely to increase with the advent of the new harvesting season and in our view the volumes will continue to grow,” said Rakesh.
All told, retail volume is a true testament to demand. It remains to be seen whether the festive season adds to the growth in retail volumes, especially with higher rural exposure for 2W companies. Vehicle registration-wise, Hero Moto has lost its top spot in the number of 2W sold in India for the first time in September to Honda Motorcycle & Scooter India. This is because of Hero’s large presence in high rural risk states like Uttar Pradesh and Bihar. Moreover, the automaker’s wider presence in motorcycles is also not helping as these consumers are more price sensitive.
The festive season augurs well for PV and 2W retail volumes, but the true picture will emerge after the demand environment.
A meaningful increase in volumes will be the major trigger for the above stocks, which are down 6%-26% from their respective 52-week highs. Besides, better-than-expected margin performance in Q2 will boost investor sentiment. “We prefer 4-wheelers over 2W because of the strong demand and offering a stable competitive environment,” analysts at Motilal Oswal said in an October 2 report.
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