BackFor auto companies, 2022 may be smoother than 2021
Underlying PV demand seems fine, aided by the rise in personal mobility needs due to covidGood progress of kharif procurement and higher rabi sowing may improve tractor demand
PremiumTata Motors Ltd ended 2021 on a high note. Its domestic passenger vehicle (PV) sales rose by 50% in December from a year ago. Meanwhile, Maruti Suzuki India Ltd saw its PV volumes drop by 12.6%. Even so, both companies saw a month-on-month improvement in sales volume. Some analysts reckon the sequential rise indicates an improvement in availability of semiconductor chips. As such, the underlying demand for PVs appears robust, partly helped by the increased need for personal mobility due to the covid-19 pandemic.
The commercial vehicle (CV) segment continued its recovery in December. For domestic two-wheelers and tractors, though, it was a bumpy road. Slow recovery in the rural economy is one reason for the pain. In December, TVS Motor Co. Ltd saw about a 9% drop in overall two-wheeler sales, while Hero MotoCorp Ltd’s sales fell 12%. According to Motilal Oswal Financial Services, tractor volumes (Mahindra & Mahindra plus Escorts) in December declined by 24% year-on-year (down 34% month-on-month) due to the focus of OEMs (original equipment manufacturers) on inventory correction. Moreover, the base was high, and some markets witnessed erratic rainfall.
The high base would continue to pose challenges for the tractor segment, at least in the initial phases of the new year. Good progress of kharif procurement and higher rabi sowing, though, may help improve the pace of recovery over the coming months.
Expectations from the two-wheeler segment aren’t particularly high. The rise in covid-19 cases bring the risk of restrictions and may weigh on consumer sentiment, especially for the low-income category. Sharp price hikes in this segment have also weighed on demand. “Two-wheeler demand is likely to pick up the pace (contingent upon new covid strain) in the fourth quarter, driven by encouraging farm output and the marriage season," said analysts from JM Financial Institutional Securities Ltd in a report on 3 January.
Meanwhile, demand for CVs is likely to gain traction due to increased infrastructure activity supported by the government. Further, demand for PVs is on a solid footing for now. JM Financial’s analysts point out, “In PV segment, wholesales in near-term are likely to be a function of normalization of chip supply as the underlying demand remains robust."
Overall, swelling demand for personal mobility, progress in the nascent EV (electric vehicle) industry, the threat from chip shortage and Omicron will widely drive the automobile sector in 2022.
To be sure, 2022 may well bring respite on some counts for Indian auto companies. Kumar Rakesh, senior automobile and technology analyst at BNP Paribas India, said, “Raw material prices are stabilizing. This, along with announced price hikes, would positively impact the margins of automakers."
The semiconductor supply situation requires close monitoring, and 2022 may turn out to be better on this front. According to Rakesh, “Semiconductor supply shortage appears to have bottomed out and should see gradual improvement over 2022 as new capacities come online. That said, our analysis of commentaries from global OEMs and semiconductor suppliers suggests the supply shortage will spill over in CY22."
Meanwhile, in 2022, the auto industry could also see an accelerated transition to EVs. Recall how optimism about the EV segment boosted sentiments for Tata Motors, whose stock appreciated around 160% in 2021. Overall, even as some aspects show signs of improvement for the auto industry, investors should also track the impact on demand owing to the pandemic. As such, the potential third covid wave remains a significant risk.
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