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After a washout in April, there could be some improvement in auto sales in May given the relaxations from lockdown. The government allowed to open standalone shops, e-commerce sector, and several factories/industries with partial capacity (30-40 percent) in green and orange zones only. The companies will announce their May sales in the initial part of next week.
The nationwide lockdown began on March 25 and we will enter into fifth phase of lockdown on June 1 for a month which is restricted to containment zones only, so rest of India will re-open in phases from the second week of June.
Hence, May could be better than April wherein there was no or negligible sales (on a case-to-case basis) in India due to complete lockdown.
On a year-on-year basis, brokerages expect significant fall in sales of commercial vehicle (CV), passenger vehicle (PV) and two-wheelers, but tractor may a muted fall compared to other segments due to early re-opening of agricultural activities, good rabi harvest and news of normal monsoon this year.
"Our industry survey suggests that retail demand has recovered relatively faster in rural areas as rabi harvest has been good and government procurement of wheat has been high (wheat procurement in April-May already above FY20 levels). Hence, we expect a faster recovery in the tractor segment, followed by two-wheelers (2Ws) and PVs (in that order)," Nomura said.
"However, financing remains a constraint as the percentage of buyers opting for the moratorium is the highest in medium and heavy commercial vehicle (MHCVs) (50-70 percent), followed by tractors (40-50 percent), and 2/4Ws (25-30 percent). Also, production ramp-up is likely to remain slow due to supply chain bottlenecks, social distancing norms, COVID-19 cases among workers and labour shortages," it added.
After relief for agriculture sector from lockdown and good rabi harvest, the inquiries for two-wheeler and passenger vehicles have been higher in May particularly in rural, tier-2 and tier-3 cities where there are many green and orange zones, but commercial vehicle segment has not seen any pick up in demand and inquiries, brokerages feel.
"Our interaction with leading industry channel partners indicates 2W/PVs are seeing a resurgence in inquiries (around 50 percent of normal at operational dealerships). On the other hand, CVs are seeing negligible demand (from the construction sector only). Overall consumer sentiment is low and even in rural markets, customers are cautious with spending given the uncertain environment," said Motilal Oswal.
The brokerage expects wholesales to decline substantially in May 2020 for all OEMs due to (a) the lockdown, (b) absence of non-discretionary demand, and (c) supply constraints. "While demand for 2Ws and PVs is seeing some recovery from semi-urban and rural markets, CVs have minimal demand due to low economic activity and cautious financiers as many operators have already opted for the moratorium. Also, to lend to CVs/3Ws, financiers currently are stringent and highly risk-averse."
In May, wholesale volumes are estimated to decline around 77/77/90 percent YoY for 2Ws/PVs/CVs due to the lockdown and low demand, while tractors volumes are expected to decline by around 71 percent YoY, said Motilal Oswal.
Retail sales in two-wheelers, PVs and CVs are also expected to see a massive fall on a year-on-year basis, but tractor sales could be better than others, brokerages feel.
"For May-20, we expect the PV industry to decline around 75 percent YoY. The recovery is likely to be slow due to higher share of top cities. Also, downtrading to smaller cars should benefit Maruti Suzuki," Nomura said.
For two-wheelers, the Japanese brokerage expects industry volumes to decline by around 84 percent YoY. "The recovery in this segment is likely to be faster due to higher rural share. Also, a downtrading is likely in the <125cc segment due to lower price increase. This should benefit Hero Motocorp."
In MHCVs, "despatches are likely to remain very low. Only around 30 percent of the existing truck fleet is plying on the roads and there is virtually no demand for new trucks. We expect industry volumes to decline 96 percent YoY," Nomura said.
Given the challenges to both demand and supply, near-term volumes are not representative of underlying demand and may also be quite volatile, the brokerage feels.
Nomura has a buy call on Hero Motocorp in two-wheeler segment, while M&M remained its top pick in PV sector due to higher rural exposure where the recovery is faster, initiatives to address capital allocation concerns and attractive valuations.
Prabhudas Lilladher bets on Maruti Suzuki and Eicher Motors among original equipment manufacturers (OEM).
"In case of Maruti Suzuki, the structural levers are in-tact (continues shift in demand for a petrol vehicle, reducing JPY exposure and increasing share of premium products), while in Eicher Motors, Royal Enfield's focus on increasing penetration in key motorcycling states and gaining monopoly along with natural upgrade option in 300+cc category will help in global expansion," the brokerage explained.
Motilal Oswal's largecap picks are Eicher Motors and Maruti Suzuki.
"The near-term demand outlook is weak as we see a gradual restoration of normalcy post lifting of the lockdown. We hope for gradual recovery from second half of FY21, which should be led by the festive season," the brokerage said.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.