Analysts expect the ‘pent-up demand’ story to play out from the second quarter of the financial year 2021-22 (Q2FY22) as states unlock
It was a sense of déjà vu for the automobile sector in May as Covid second wave swept across the country, once again triggering state-wise and localised lockdowns.
Owing to this, automobile companies posted extremely muted sales figure, with high double-digit month-on-month (MoM) decline across segments. This was for the second straight month that the auto sales figures took a hit and analysts expect volumes to remain subdued in June too amid Covid-led disruptions.
But will this phenomenon last long?
Analysts tracking the sector expect the ‘pent-up demand’ story to play out from the second quarter of the financial year 2021-22 (Q2FY22) as states unlock. Furthermore, pick up in vaccination pace also holds the key for a revival in the auto space, they said.
The optimism of strong recovery is visible in the stock price movement of auto companies. Despite severe lockdowns across states in May, auto stocks have surged between 5-11 per cent last month, barring TVS Motors Company that shed 2 per cent. During the period, the BSE Auto index added over 8 per cent as against a rise of 6 per cent in the benchmark Sensex.
Web activity (Google searches for PV OEMs) indicates interest in passenger vehicles (PVs) has bottomed above 2020 lows and is inflecting again, as per a Jefferies report. “This, along with the sharp fall in new Covid cases, suggest a demand recovery is around the corner,” wrote Nitij Mangal and Sagar Sahu, equity research analysts at the global brokerage.
For those at Reliance Securities, a pick-up in vaccination is expected to improve the situation going forward. They believe the long-term fundamentals for the auto sector remain intact and remain bullish on Tata Motors, Bharat Forge and Ashok Leyland.
Meanwhile, the passenger vehicle (PV) demand for both, two-wheelers and four-wheelers, is expected to remain strong amid Covid-19, following a preference for personal transport, analysts at Sharkhan said.
“Rural demand is expected to recover strongly which will drive the tractor sales. We expect the strongest recovery in the CV segment in FY2022 and FY2023, driven by an improvement in economic activities and low-interest rate regime,” the brokerage added, retaining a positive view on the sector.
That said, extension of partial lockdowns and slowdown in the pace of vaccinations are among key risks to the outlook, analysts caution. Moreover, fears of a third Covid wave also loom large over the sector.
“In case of a third wave, Q2 and Q3, could be washed out quarters too for the auto sector. In such a scenario, FY22 auto sales growth could fall to mid or low single-digits from our current projection of 10-15 per cent,” said Ashwin Patil, senior research analyst – auto at LKP Securities.
He added: The auto sector is expected to bounce back but the pace could be slower compared with the previous year as the infection spread has penetrated deeply in rural market and immediate buying might not be seen. M&M, Tata Motors, Maruti Suzuki and Bajaj Auto are among Patil’s top picks from the space.