We prefer 4Ws over 2Ws in auto space; Ashok Leyland, Maruti top picks: Siddhartha Khemka

This festive season was the first normal season after two years (COVID-affected period). Interaction with leading auto industry channel partners indicates a positive sentiment for all categories.

Retail sales during the festive season in Oct’22 (part of Navratras and Diwali) have seen a healthy uptick for all categories, especially for 2Ws. The entry-level segment in 2Ws and PVs, which was the worst impacted, has seen a recovery, but volumes were substantially below pre-COVID levels.

In Oct’22, wholesale volumes are estimated to grow by 35%/8%/7% YoY for PVs/3Ws/CVs, but decline by 2%/7% for 2Ws/tractors.

The decline in wholesales for 2Ws and tractors was largely due to the timing difference of Diwali v/s last year (the first week of Nov’21).

In Oct’22, 2W saw healthy retail sales, with double-digit growth on the back of the festive season. West and Central India fared better than other parts of the country. This has resulted in a liquidation of inventory to 20-25 days from 50-60 days earlier.

While the supply situation has largely improved, premium models for TVS Motor have still not recovered completely. With demand remaining strong and semiconductor shortages easing, PV Wholesales is expected to remain strong.

The waiting period has started easing across models, but still remains high for XUV700 and Scorpio N. Inventory in the system is 15-20 days. Demand for CVs has remained stable. Inventory in the channel is at optimal levels (20-30 days).

Tractor retail demand during the festive season grew in mid-single digits. OEMs have been aggressively offering discounts to gain market share.

Late rainfall in states like Uttar Pradesh and Bihar has made up for the deficient rainfall in the early part of the season. Inventory in the system stands at ~30 days.

Easing semiconductor supplies boosted PV retail sales. The demand momentum in CVs is quite stable. The sustenance of 2W demand, which improved during the festive season, is key.

We prefer 4Ws over 2Ws on the back of strong demand and as they offer a stable competitive environment. We expect the momentum in the CV cycle to continue.

We prefer companies with: a) higher visibility in terms of demand recovery, b) a strong competitive positioning, c) encouraging margin drivers, and d) a strong Balance Sheet.

Ashok Leyland: Target Rs 185
Ashok Leyland's focus on expanding and creating new profit/revenue pools is likely to de-risk the business – the share of domestic trucks in revenue is likely to shrink to ~61.7% by FY25E.

Unlike the previous cycles, AL is on a strong footing with a lean cost structure and reasonable debt. We expect revenue/PAT to grow at 44%/363% CAGR over FY22–25E.

Maruti Suzuki India: Target Rs 11,250
MSIL can emerge as the biggest beneficiary of a demand recovery once the COVID pandemic ends, considering its stronghold in the entry-level segment and a favourable product lifecycle.

We expect a recovery in both market share and margin in 2HFY23, led by an improvement in supplies and mix, a favourable product lifecycle, RM and forex benefits, and operating leverage.

We expect ~14% volume CAGR over FY22-25E. This, coupled with an improved mix and lower discounts, will drive ~19% revenue CAGR over FY22-25E.

(The author is Head – Retail Research, Motilal Oswal Financial Services Limited)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)