Auto industry outlook 2023: Maruti Suzuki, Ashok Leyland could give 20-30% returns

The auto industry is witnessing positive demand sentiments for PV, CV, and tractors although 2W demand has again turned weak.

After a healthy recovery over the last two-three months, 2W demand momentum has slowed down again, resulting in an expected decline of 5-7% YoY for retail volume in Dec’22.

While the rural sentiments is turning positive, it is not benefitting 2W demand, especially in the lower-end segment.

Due to lower retails, the inventory level for HMCL has increased to seven to eight weeks (v/s six to seven weeks till last month).

Inventory has largely remained stable at four to five weeks for other players. OEM discounts are largely muted, except for some exchange benefits of up to Rs 2,000/unit and discounts by dealers of up to Rs 1500/unit, varying across regions.

We noted that HMCL took a price hike of Rs 900-1,500/unit in Dec’22. RE Hunter continues to see healthy demand as waiting remains intact at 1-1.5 months, while Classic 350, too, is witnessing healthy demand. The waiting period for other models is < two weeks depending on the colour and specs.

PV demand remains unaffected led by a healthy order backlog and high discounting. However, routine maintenance shutdown in MSIL and a marginal increase in supply-side challenges adversely impacted dispatches for Dec’22.

Our check suggests that the order backlog for MSIL stands at >340k units, out of which, Grand Vitara accounts for 15-17% of the bookings.

Both the new launches - Grand Vitara (seven-eight months waiting) and Brezza (five to six months waiting) are witnessing healthy traction.

For M&M, especially in the high-end segment, the waiting period for new launches such as XUV700 (up to 12 months), Scorpio N (up to 8 months), and Scorpio Classic (up to 6 months) is high, however, the cancellation rate to stands at 17-18%.

In Tata Motors (TTMT), the waiting period for Nexon stands at three to four months.

Despite the high order backlog, discount schemes/benefits are as high as Rs 65-75k/units (three to four-year high) across all OEMs. The average inventory is ~30 days for PV OEMs.

We noted a recovery in CV demand sentiments, led by sequential growth in fleet utilization level to 78-80%, an increase in freight rates by 1.5-2%, and increasing discounts.

This has helped transporters to offset the impact of rising interest cost to some extent. While the demand is majorly driven by large fleet operators, there has been a gradual pickup in demand from small fleet operators as well.

However, we are yet to see a broad-based recovery in both customer segments, especially through new fleet additions.

We noted that discounts increased to 9-10%, with Ashok Leyland offering higher discounts than its key peers with an aim to improve its market share.

The shift from CNG to diesel continues due to the rising CNG prices as our feedback suggests a ratio of CNG within ICV is now less than 40% vs over 60%, a year back, in key regions. Channel inventory currently stands at over 30 days (stable MoM).

Agri sentiments across regions remain positive, led by healthy reservoir levels, better crop yield, and favourable financing.

However, these benefits do not fully reflect in Dec’22 wholesales due to lower scope of inventory push across OEMs and the beginning of the inauspicious season (Kharmas). Inventory level largely remains stable at 33-35 days across key OEMs.

Moreover, the financing situation seems positive as LTV is now 90-95% in some of the geographies. Discounts have come off further this month to INR20-30k but vary across regions.

As per our interaction with one of the dealers, effective tractor prices have increased an average of ~Rs 20k/unit led by i) price hike of ~Rs 15k/unit in mid-Nov, ii) discounts coming off by ~ Rs 5k/unit in Dec’22.

Overall, we prefer 4Ws over 2Ws, on the back of a strong order book, traction for new model launches and a stable competitive environment.

We expect the CV cycle to maintain its momentum led by a healthy fleet utilization level, strong demand in underlying industries, and a better supply chain situation.

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.

Maruti Suzuki India: Buy| LTP Rs 8459| Target Rs 11250| Upside 33%
Strong demand and a favourable product lifecycle for MSIL augur well for market share and margin.

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

Ashok Leyland: Buy| Target Rs 180| LTP Rs 148| Upside 22%
2QFY23 witnessed a continued recovery in market share and the start of a margin recovery, led by initial gains in commodity prices.

Good demand, a stable pricing environment, and softening commodity prices should drive a strong recovery in its financial performance.

AL is the best play on a CV cycle recovery, market share recovery, and a bet on an expansion of revenue and profit pools.

(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)