Auto sector: PV wholesales in line, MHCVs ahead

Industry wholesale volumes were largely in line with our estimates for passenger vehicles (PVs), while those for medium heavy commercial vehicles (MHCVs) were ahead. We note a strong high-base effect from June 2021 due to the recovery from the second wave of COVID-19; thus, we have compared volumes sequentially as well. We expect PV demand to remain skewed towards new launches/EVs/CNG/SUVs and entry-segment cars and 2Ws to remain weak, reflecting the weak demand from mass consumption segments.

However, with chip supplies improving, we expect even stronger PV wholesales from July onwards. As inventories fill up, order books will be tested. One key risk to watch out for is the potential rise in discounts in H2FY23F. On EVs, 2W EV share inched up to 3.8% (3.2% in May-22) as supply issues are normalising. In e-PVs, TTMT’s EV sales sustained at ~3.5k units, flat m-o-m. Overall, we expect industry growth of 50%/20%/11% for HCVs/PVs/2Ws in FY23F.

In terms of costs, our commodity cost index is down ~150bp each for PVs and 2Ws currently, based on our calculation, vs Jan-Feb levels. Moreover, OEMs have already taken price hikes of ~1-2% in Q1FY23F. Hence, we expect its full benefit to reflect in margins by Q2FY23F. Among our covered OEs, we prefer M&M (MM IN, Buy) due to strong model cycle tailwinds. We also like Tata Motors (TTMT IN, Buy) and Ashok Leyland (AL IN, Buy). Higher production, rising electrification, premiumisation driving content per vehicle will be the key value drivers for suppliers. Hence, we prefer Sona (SONACOMS IN, Buy), Minda Industries (MNDA IN, Buy) and Sansera (SANSERA IN, Buy).

PV volumes likely up 25% y-o-y: Maruti Suzuki’s (MSIL IN, Neutral) domestic volumes (ex LCV and OE) were down 1% y-o-y. Overall sales were up 6% y-o-y on stronger exports. MM’s UV volumes were up 60% y-o-y. TTMT’s PVs were up 88% y-o-y.

MHCV volumes likely up 136% y-o-y: Nearly all players surprised positively. AL volumes: +238% y-o-y; TTMT: +87% y-o-y; and VECV: 159% y-o-y.

Tractor volumes likely down 13% y-o-y: M&M’s volumes fell 13% y-o-y, while Escorts’ were down 20% y-o-y.

2W volumes likely up 21% y-o-y: Domestic retail volumes for Hero Motocorp (HMCL IN, Neutral) and Bajaj Auto (BJAUT IN, Buy) declined y-o-y in the month. TVS (TVSL IN, Neutral) volumes were up 22% y-o-y overall.