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The recovery in sales is being driven by pent-up demand and first time buyers looking for personal mobility in the absence of public transportation.. Photo: Ramesh Pathania/Mint
The recovery in sales is being driven by pent-up demand and first time buyers looking for personal mobility in the absence of public transportation.. Photo: Ramesh Pathania/Mint

Low replacement demand, missing upgrades put auto revival at risk

  • Companies with greater exposure to rural, semi-urban regions and higher number of entry level or lower priced vehicles in product portfolio saw better recovery in sales

MUMBAI: As automobile sales recover from the record lows of April and May, one question on everyone’s mind is how sustainable this recovery is. Note that the recovery is being driven by pent-up demand and first time buyers looking for personal mobility, given the challenges of public transportation.

Sales from upgradation and replacement of older vehicles were low, reveal Dolat Capital Market Pvt. Ltd’s interactions with auto dealers and distributors. “Exchange of vehicles has reduced drastically (to 30-35% of the normal level) with most sales coming from first time buyers," analysts at Dolat said in a note referring to the two-wheeler segment.

The scenario is similar in passenger vehicles (four wheelers). Enquiries improved post reopening of showrooms and retail sales outlets. But constrained business activity and fall in incomes have hit replacement demand.

“In Gujarat, which has a relatively higher exposure to business activity, there has seen significant drop in income of a large section of the society, which has led to deferment of discretionary spending," add analysts at Dolat, with reference to demand for four wheelers. With replacement and upgrades constituting half of passenger vehicle industry sales, the low discretionary spends can weigh on passenger vehicles recovery, say analysts at Dolat.

Source: Jefferies India
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Source: Jefferies India

Analysis of June automobile sales corroborate the view. Companies with greater exposure to rural, semi-urban regions and higher number of entry level or lower priced vehicles in product portfolio saw a better recovery in sales.

Hero MotoCorp Ltd reported a 27% fall in sales on year-on-year in June, lower than 30-35% reduction in sales at TVS Motor Co Ltd and Eicher Motors Ltd (Royal Enfield).

Maruti Suzuki India Ltd’s June sales reveal better sequential recovery in the relatively lower-priced mini and compact segment cars. “The (passenger vehicle) segment witnessed recovery on the back of entry level vehicles as preference for personal mobility spurred pent-up demand," Motilal Oswal Financial Services Ltd in a note to clients.

With large cities remaining under restrictions and the rural segment leading the recovery, analysts expect entry-level and mid-sized vehicle sales to continue to do better than other segments. But a broad-based recovery can happen only when major urban centres fully recover and return to normalcy.

“Given the reduction in salary and business income, we expect down trading in passenger vehicles (PVs). Original equipment manufacturers such as Maruti Suzuki, Hyundai with higher exposure to hatchbacks are likely to be the key beneficiaries. We expect higher YoY decline in FY21 for PVs (vis-à-vis two wheelers) as PVs have higher exposure to top 20 cities, which have higher number of covid-19 cases," JM Financial Institutional Securities Ltd said in a note.

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