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Last Updated : Jun 25, 2020 02:13 PM IST | Source: Moneycontrol.com

Record-high fuel prices may delay auto sector recovery: Motilal Oswal

The BS-VI cost inflation and fuel price parity will influence consumer preference while helping two-wheeler demand.

 
 
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The sharp increase in fuel prices could delay the post-COVID recovery process for the passenger vehicle (PV) industry, brokerage firm Motilal Oswal Financial Services has said.

The BS-VI related cost inflation and fuel price parity could further influence consumer preferences. It, however, should help two-wheeler demand, the brokerage said in note.

It highlighted that for the first time in living memory, diesel prices have attained parity with petrol prices due to the recent increase in indirect taxes.

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From peak pricing gap of nearly Rs 32 per litre in June 2012 to Rs 21 per litre in July 2015 to the current parity, the share of diesel vehicles in the PV industry has already undergone a sharp reduction (from the peak of 58 percent in FY13 to 29 percent in FY20 to nearly 15 percent in Q4FY20), Motilal Oswal said.

In a note on June 24, the brokerage said the consumer preference has a high correlation with the pricing gap between fuels and the total cost of ownership.

For example share of diesel vehicles was the highest at nearly 58 percent in FY13 and in sync with the peak price gap seen in July 2012. However, as the gap narrowed to nearly Rs 7 per litre in FY20, the share of diesel vehicles also reduced to a low of nearly 29 percent in FY20 (approximately 15 percent in Q4FY20.

"With the double whammy of increase in the initial cost of ownership for BS-VI diesel vehicles as well as no material pricing advantage of diesel, it could further lead to a reduction in the share of diesel vehicles. Under BS-VI, at current diesel prices, the payback period would be 8.5-9.5 years to recover the higher initial cost of ownership," said the brokerage.

The coronavirus pandemic has not only put the brakes on initial signs of recovery seen in two-wheelers and PVs but also brought in uncertainty, considering the several unknowns associated with its impact, it said. This potentially deepens the impact of the BS-VI-related price increase on FY21 demand.

The brokerage is of the view that valuations are reflecting recovery from the second half of FY21, leaving a limited margin of safety for any negative surprises.

Motilal Oswal prefers companies with higher visibility in terms of demand recovery, strong competitive positioning, margin drivers and balance sheet strength.

"Mahindra & Mahindra and Eicher Motors are our top large-cap picks. Among the mid-caps, we prefer Motherson Sumi Systems," said the brokerage.

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.
First Published on Jun 25, 2020 02:13 pm
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