Auto sector hopes for quick recovery in upcoming festive season: Emkay

Amid economic slowdown and lingering impact of Covid-19 lockdown, automobile manufacturers are hoping for a quick rebound in sales during the upcoming festive season, according to a channel check report by Emkay Global Financial Services.

The retail volume improvement in August and September has been driven by pent-up demand, positive rural sentiment, shift toward personal mobility and fading impact of price hikes, it said.

Demand has been better in small cities and rural areas in comparison with metros and tier one cities. Wholesales witnessed a healthy growth due to inventory restocking with dealers prior to the festive period.

Inventory days have increased to 30 to 40 days in passenger vehicles and 35 to 45 days in two-wheelers. Led by robust rural demand and personal mobility, the share of entry-level segments is increasing both in passenger vehicles and two-wheelers.

Emkay said the companies benefiting from this trend include Maruti Suzuki in passenger vehicles and Hero MotoCorp in two-wheelers. Premium segment volumes are also improving, supported by lesser impact on income levels and adequate finance availability for customers in these segments.

The demand has been better for salaried class people (especially government employees) in comparison to self-employed and business class segments. Demand has been better for personal vehicles in comparison with fleet vehicles.

File photo used for representational purpose only

Emkay said that financiers are being extremely selective in providing loans to the fleet segment.

On the other hand, rural prosperity has been driving the demand for tractors. Tractor industry demand has been strong at 12 per cent growth in H1 FY21 due to positive rural sentiments. Farm income levels have improved because of better yield and prices.

In addition, increased government outlay for agriculture and rural segments has supported the sentiment. The south and west regions are outpacing north and east regions. Significantly, the demand has been stronger than supply.

Original equipment manufacturers are working toward ramping up production, and most companies are working at over 80 per cent utilisation.

Given that festive season is starting after a lengthy 'inauspicious' period, the demand pick-up is expected across segments. For tractors, the growth is expected to be in double digits while for passenger vehicles and two-wheelers, it is expected to be flat or in single digits.

"The months of August and September have brought plenty of signs that volumes may be well along recovery from a sharp cyclical downturn. We estimate that the recent recovery will manifest into a powerful cyclical rally across segments," said Emkay.