June saw good sales due to pent-up demand. It will be July and August data that will provide a clearer picture of retail demand, say experts.
Auto sales number--one of the most important measures of the health of an economy--saw a mild uptick in June, raising hopes that things will return to normal in the coming months.
Vehicle sales in the month climbed to 50 percent of pre-COVID levels, while dealers reported a surge in online inquiries.
Dispatches of cars and SUVs to dealers more than doubled during June compared to May but are still less than half of their usual monthly level.
Unserviced bookings, pent-up demand and an increase in production are believed to be the main reasons behind the surge in June sales.
The last month of Q1FY21, June, witnessed a good sequential recovery in auto space. Sales of most of the original equipment manufacturers (OEMs) grew, thanks to the opening up of markets, plants, dealerships, etc., under the Unlock 1.0 regime.
Pent-up demand supported a sharper recovery in retail sales for passenger vehicles (PV) and two-wheelers.
The tractor segment demand remained buoyant amid improving farm sentiments. Commercial vehicles (CVs) remained a laggard in terms of recovery in volumes.
Carmakers have yet not seen full utilisation of their dealer strength as several showrooms, which are in the containment zones like Mumbai, remain shut. While footfalls in showrooms have been low but online and phone inquiries have surged compared to pre-lockdown months, dealers say.
Long road ahead
LKP Securities, in a note, said that as compared to May, the dealers are finding themselves in a better position as most of them are now able to sell-off their inventories of the lockdown period, thus aiding OEMs to increase their capacity utilisation.
The brokerage expects the trend of month-over-month growth to continue.
"Although there is uncertainty about it, as the unlock process goes ahead, we should witness slow but steady traction in auto sales," LKP said.
However, the sector still has a lot of pain left and will take longer to come back to normal.
While demand recovery has surprised everyone, sustenance remains a key monitorable. Two-wheelers and tractors may see decent growth due to a favourable rural outlook, the rest may continue to experience a tough ride.
"Demand in two-wheelers is expected to be much more than the four-wheelers as the need for consumers to spend only for essential transport will be higher. Four-wheelers might not experience any drastic change in demand at least for the next few months," said Nirali Shah, Senior Research Analyst, Samco Securities.
"Tractors, on the other hand, can witness higher growth, given the boost in the agriculture space. Hence, commercial vehicle players and two-wheelers could emerge as dark horses going forward. But if a scrappage policy is announced, it could be game-changer for the auto space and any news on that front would be good."
Rusmik Oza, Executive Vice President and Head of Fundamental Research at Kotak Securities, is of the view that valuations seem to be on the higher side, considering the severe impact on future earnings.
"The reality is that sub-optimal utilisation will lead to negative operating leverage and lower return ratios. Although there is hope that more people will use their own vehicles post lockdown, the near-term demand could still remain tepid due to job losses and reduced salary structures across various industries," Oza said.
The demand for automobiles was expected to improve over the medium to longer-term, as things go back to normal and GDP would grow to 5 percent and above, Oza said.
Expectations of good monsoon, government support for the rural sector, shorter lockdown period for tractor dealerships, consideration of tractors as essential services and minimum impact of COVID-19 on the rural markets remain positive for the two-wheeler and tractor segments.
On the other hand, weak macros, driver unavailability, tepid industry output, lack of clarity on scrappage norms and price hikes due to BS-VI are the challenges that the CV segment has to deal with.
Brokerages feel a clearer trend will emerge in the coming months.
"The June 2020 demand trends are positively impacted by pent-up demand release which has likely been accentuated by demand related to marriages in North India. Thus extrapolation of June retail recovery trends into upcoming months might be flawed. The data emerging in July and August months would provide a clearer retail demand structure," said ICICI Securities.Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.