On the recovery path, auto sector has a bumpy ride
Premium- The Ukraine war has ignited commodity prices which have a bearing on the automobile sector
- While PVs and CVs have done well, two- wheelers and tractors showed no signs of recovery
The Nifty Auto index was the biggest loser among sectoral indices on Wednesday, falling by almost 3%, on a day when the Nifty50 index fell by 1%.
The jitters are understandable. For one, the Ukraine war has ignited the prices of commodities, including crude oil and aluminium, both of which have a bearing on the automobile sector. As such, rising costs are a worry. “Our Commodity Cost Index has started inching up and is 50-100 basis points (bps) higher for PVs and 150-200 bps higher for 2Ws currently versus the Q3FY22 levels," said analysts from Nomura Financial Advisory and Securities (India) Pvt. Ltd in a report on 1 March. One basis point is 0.01%. PVs and 2Ws refer to passenger vehicles and two-wheelers, respectively. “Hence, we think that further price hikes may be required in Q1FY23F to support margins if the current trend persists," the brokerage said.
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Moreover, it is not as if February volume numbers are inspiring. PVs and commercial vehicles (CVs) have done well, but 2Ws and tractors showed no sign of recovery. Higher demand for personal mobility, along with easing of the semiconductor crisis aided the PV segment. In February, Mahindra and Mahindra Ltd’s (M&M) domestic PV volumes grew by 80% year-on-year (y-o-y), helped by utility vehicle sales. Tata Motors Ltd’s domestic PV sales rose 47% y-o-y. Maruti Suzuki India Ltd’s domestic PV volumes fell by 7.5% y-o-y, but an all-time high export meant flattish overall volumes.
Meanwhile, a high base and muted rural demand meant M&M and Escorts Ltd’s tractor volumes dropped by 27% and 46% y-o-y, respectively. The domestic 2W volumes of TVS Motor Co. Ltd, Hero MotoCorp Ltd, and Bajaj Auto Ltd fell by 11%, 32%, and 35% y-o-y, respectively. Bajaj’s steeper fall is due to semiconductor shortages as a key supplier faced a huge shortfall. Better exports partly made up for domestic fall in 2Ws.
CVs are on a good footing. “The growth in the CV segment is primarily because of a cyclical upturn. The segment is seeing more replacement demand. With economic activity picking up and increased spend on infrastructure, the demand momentum is likely to continue," said Varun Baxi, analyst at Prabhudas Lilladher. Also, remote working has accelerated the use of e-commerce platforms, thereby driving growth for CVs.
True, the expected healthy rabi crop harvest boosting rural cash flows bodes well for 2Ws particularly. However, higher Brent crude prices (over $110 a barrel at the time of printing) would mean a rise in the cost of ownership and that is a risk for 2Ws. “We believe a slowdown in mass consumption is a key risk to watch out for as we go into FY23F, especially for 2Ws and entry segment cars, as oil prices are likely to rise in March," said Nomura. “The freight rates for automakers will increase, which will weigh on margins," Baxi said in this context.
What’s more, there is a possibility of the semiconductor crisis worsening because of the ongoing geopolitical tensions. “Ukraine supplies specialty gases required by the chip-making industry. Thus, there is potential of an extension of the stress in the supply chain of semiconductors, which are key to manufacturing autos and other electronic equipment in the Asia-Pacific region," said a report by Moody’s Analytics.
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On the flip side, there could be an accelerated conversion to electric vehicles (EVs) once the retail fuel prices are increased. In February, Tata Motors reported 479% y-o-y growth in EV volumes, but it remained flattish sequentially. “Despite supply constraints, EV 2W sales continued to inch up (~3.3% in February versus 2.7% in January). We expect further ramp up in the EV mix in March 22," said the Nomura report.
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