Auto firms piggyback on tractors’ success

What’s more, with the budget announcements in favour of the rural and agricultural sector, tractor volumes are expected to maintain the momentum. However, there is a fresh risk of the possibility of 2023 being an El Niño year. El Niño typically creates hotter summers and weaker monsoon and if the risk plays out, it would be detrimental to rural demand. Eventually, this could also act as a sentiment dampener for investors in auto stocks. Not just tractors, entry level passenger vehicles (PV) and two-wheelers (2W) would also bear the brunt.

As such, demand in the mass segments is already on a weak footing. Hero MotoCorp Ltd, which primarily caters to the entry level 2W segment, saw a 10% y-o-y growth in February volumes benefitting from a low base. The volumes are still 36% below pre-covid levels (February 2019). Also, Bajaj Auto Ltd and TVS Motor Co. Ltd’s volumes are lower by 28% and nearly 7% versus February 2019 levels, respectively.

But subdued export markets are also one factor denting 2W companies’ volumes. Economic stress in countries like Nigeria has prompted Bajaj Auto to take production cuts to the extent of 25% across 2Ws and three-wheelers. In February, exports were down by as much as 37-55% y-o-y across the 2W makers.

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The upcoming wedding season would bode well for the 2W segment and is expected to aid volume growth. In the PV segment, analysts at Motilal Oswal Financial Services note that enquiries in the entry-level segment have not yet recovered completely. This segment forms a significant volume share for Maruti Suzuki India Ltd and volumes were up by only 3% y-o-y. In fact, a large presence here weighed on its market share, which was at 48% in FY21. Last month, Maruti’s market share stood at about 44%, according to Kotak Institutional Equities. But increasing traction for its sport utility vehicles (SUV), volumes of which were up by over 32% in February, is helping the automaker regain its lost market share. Overall, demand in the PV segment continues to remain healthy, mainly led by SUVs, and the momentum is expected to continue.

Meanwhile, the commercial vehicle (CV) segment saw increased traction in medium and heavy CVs in February. This was led by pre-buying before transition to real driving emissions (RDE) norms effective April. “Pre-buying may continue in March 2023 as prices are likely to rise by 3-4% from April 2023 post the implementation of RDE norms,” said Nomura Financial Advisory and Securities (India) in a report on 1 March. Further, the government’s push towards infrastructure would boost demand for CVs.

On the electric vehicle (EV) front, TVS continues to lead the listed 2W pack with retail market share of 19% in February versus 16% in January. In PVs, Tata Motors EVs continue to maintain the acceleration while M&M is emerging as a strong competitor.

Meanwhile, on the margin front, there are levers for growth for the sector. Nomura’s commodity cost index has been largely flattish over the past month. Moreover, price hikes taken by companies would aid margin expansion. Even so, pick-up in volumes is a key catalyst for auto stocks, which are down by 9%-20% from their respective 52-week highs. For this, rural demand necessitates closer tracking.