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Lower costs, price hikes in some segments are bright spots for autos

Two-wheeler demand is likely to stage a steady recovery on the back of improving rural sentiments against the backdrop of expectations of a normal monsoon. (Mint)Premium
Two-wheeler demand is likely to stage a steady recovery on the back of improving rural sentiments against the backdrop of expectations of a normal monsoon. (Mint)

  • A combination of growth and improving gross margin would aid earnings upgrades in the sector in coming quarters with subsequent improvement in valuation multiples, according to analysts at ICICI Securities

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The two-wheeler industry has resorted to price hikes in the entry segment and in premium motorcycles, shows channel check by Nirmal Bang Equities. Hero MotoCorp took a price hike of about 1000- 1,500 in May’22, while TVS Motor Co. hiked prices in June’22. Royal Enfield (Eicher Motors) took a price hike of about Rs4000-Rs5000 last month.

With costs of commodities such as steel and aluminium softening, there is scope for margin improvement. Also, two-wheeler demand is likely to stage a steady recovery on the back of improving rural sentiments against the backdrop of expectations of a normal monsoon. Further, the opening of offices and colleges would boost demand. But higher fuel prices mean an increase in the total cost of ownership, which is a worry.

This is also a concern for entry-level passenger vehicles. But increased preference for personal mobility is driving demand in this segment. Also, there is a trend of premiumization in passenger vehicle segment amid a shift in demand towards sport utility vehicles (SUVs). Though supply chain constraints are easing gradually, it is still a headwind as few variants are seeing long waiting periods.

“Q1 retail sales in passenger vehicles/medium & heavy commercial vehicles, if prorated for full year, are almost at par with FY19 highs, signifying about 25-30% cumulative total cost of ownership inflation in FY20-FY22 getting fully absorbed by the market," added the ICICI Securities report. Note that analysts have prorated first half of June retail sales to arrive at full month retail sales, and subsequently, retail sales for the quarter.

The commercial vehicle segment is currently seeing a cyclical upturn in demand. Increased infrastructure spending by the government bodes well. “The recent cut in fuel prices has not been effectively passed on, thus improving the profitability of the fleet operators," added the Nirmal Bang report.

Unsurprisingly, the Nifty auto index has remained flat so far in the calendar year 2022 in contrast to the movement seen in benchmark Nifty50 index which has declined by 11.8%.

Overall, combination of growth and improving gross margin would aid earnings upgrades in the sector in coming quarters with subsequent improvement in valuation multiples, according to analysts at ICICI Securities.

To be sure, lower than expected revival in rural demand and adverse movement in commodity costs remain key risks.

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