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File photo used for representational purpose only
File photo used for representational purpose only

PVs, trucks may see some revival; two-wheelers to struggle: Report

  • The domestic auto industry is going through a tough phase as weakening economy has been impacting demand amid big regulatory changes.

After the worst volume contraction in four decades, the auto industry will continue to struggle in the medium-term, given the BS 6 related cost push and the disruptions caused by the Covid pandemic, says a foreign brokerage report.

However, brokerage Jefferies sees some respite for the passenger vehicles (given the likely push for personal mobility in the light of the Covid pandemic) and commercial vehicles due to replacement demand going ahead, which will help the industry recover to some extent.

The report does not quantify the growth/demand revival, though.

But any demand revival depends largely on how the Covid pandemic infections and the related disruptions pan out, warns the report, adding the two-wheeler space will continue to struggle.

(Also read: Two-wheeler volumes likely to contract by 11-13% in FY21 due to Covid-19: Icra)

It can be noted that the domestic auto industry is going through a tough phase as weakening economy has been impacting demand amid big regulatory changes. Volumes have declined 17-18 percent in FY20 for passenger vehicle and two-wheelers, and a whopping 47 percent for trucks — the biggest fall in four decades.

"While this steep fall has created a low base, the economic impact of the Covid pandemic and cost push from BS 6 emission norms will keep near-term demand subdued. The sharp decline in oil prices and rising economic risks in Europe and the US have also weakened outlook for exports and overseas businesses," says the report.

However passenger vehicles and trucks are better placed for a demand revival. Assuming Covid eases in a few months, we believe passenger vehicles face a few other headwinds for a demand revival. The segment has a benign cost impact from BS 6 norms, and we see a case for replacement demand to kick in given rising age of vehicles in-use, the report warns.

"Passenger vehicles offer healthy long-term growth outlook given low penetration, and the pandemic should boost personal mobility," says the report, adding "we also see a high likelihood of trucks recovering in the next 12 months after the biggest fall in four decades".

Electrification, too, should be a lower threat for four-wheelers than for two-and three-wheelers over the next few years, it says.

The analysts optimism comes from their belief that competition is unlikely to worsen in passenger vehicles and trucks space as in spite of the recent entry of a few new players, competitive intensity has eased off in recent years.

It can be noted that many global OEMs, especially those from the US — Ford and GM -- have already tried hard here but failed, and are now focusing on their core markets amid weak demand and big disruptions.

The truck market is still a domestic play with over 80 percent of the volume is being concentrated with top two companies — Tata Motors and Ashik Leyland, and “we believe competition is unlikely to worsen, especially as demand recovers."

From an stock market perspective, the Nifty auto index has lagged Nifty by a whopping 40 per cent since January 2018, but "we see further headwinds for the sector in FY21 with 13-30 percent earning declines".

This story has been published from a wire agency feed without modifications to the text.

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