The auto industry is gearing up for accelerated growth in upcoming quarters on revival in demand for two-wheelers and medium and heavy commercial vehicles – such as trucks and buses, according to a report by broker Motilal Oswal. This would mean a reversal in recent trends, under which the auto industry has been growing on the back of strong demand for four-wheel passenger vehicles, particularly SUVs.
Analysts based their prediction on signs of recovery in the rural and urban markets in two-wheelers and CVs after several months of listlessness.
The Indian auto industry in general witnessed good growth in FY2023, evidenced by 20% growth in volumes to over two crore units in FY2023. This was driven primarily by the sales of cars and SUVs, with other segments remaining somewhat lackluster in their sales.
“The auto sector witnessed a healthy rebound in terms of demand, supply chains, and
operational costs after overcoming its numerous macro as well as sector-specific
challenges,” said the analysts from Motilal Oswal.
Going forward, the analysts are banking on the two-wheeler and the commercial vehicle segments. "We have modified our sector preferences in light of the same and now favor 2Ws above other sectors, followed by MHCVs [medium and heavy commercial vehicles], while we turn cautious on the PV [passenger vehicle] outlook," said the Motilal Oswal analysts.
With easing demand conditions – which had been caught in a downtrend from 2018 through the Covid-19 and post-Covid period – the auto industry is finally starting to distance itself from the spate of bad luck.
"Demand sentiments have been improving in 1HFY24, as urban continued to do well, while rural
markets are also showing signs of recovery," said analysts from Motilal Oswal.
The analysts said new launches in the two-wheeler space are likely to strengthen this trend, resulting in double-digit growth in this segment in coming years.
"Along with the lower base of previous year and improved supplies, [these factors] should drive 9-11% volume CAGR over FY23-26," said the analysts.
The analysts were also positive about the growth momentum in the medium and heavy commercial vehicle segment – comprising pick-up trucks, heavy trucks and people movers such as buses – and anticipate growth of 7-9% from FY2023 to FY2026.
"This keeps MHCVs as our second choice within the autopack," said the broking firm.
According to the analysts, demand for CVs is likely to be led by increased infrastructure-led activities and demand from the ports.
Slow Moving Passenger Vehicles
On the four-wheeler passenger vehicle segment, the analysts said that they have been seeing healthy growth led by new model launches and an improvement in the supply chain.
However, this may soon change as they are seeing 'signs of a slowdown', especially in the lower-end segment, as well as declining waiting periods for SUVs, part of which may be due to improved production.
The passenger vehicles segment is seeing slow sales in the lower end market as the demand for hatchbacks and sedans was giving way to SUVs and multipurpose passenger vehicles.
This has been the trend in recent months as the Indian passenger vehicle market is witnessing a rapid change in terms of the vehicle preferences, part of which is due to the wealth transfer from the lower middle class to the higher middle class and above.
This is widely attributed to the fact that affluent households have been less impacted by the pandemic, while lower middle class and rural markets continued feeling the pinch of job losses, medical expenses etc. As a result, the share of smaller cars has contracted.
"We expect volumes [in four-wheel passenger vehicles] to register 5-7% compounded average growth rate over FY23-26E," said the broking firm.
Meanwhile, tractors have fared poorly in the first half of FY2024 as volumes declined by 4% year-on-year. The sharp decline in tractor sales was attributed to a delay in the festive season and uneven distribution of rainfall and elimination of subsidies in key states.
This is despite the fact that tractor sales in India had exhibited a consistent growth trajectory for four consecutive years, culminating in a record 944,000 units during FY23 and marking a 12% year-on-year increase.
The period from September to November typically represents the peak season for tractor sales, coinciding with the harvesting of the kharif crops and preparations for the upcoming rabi planting season.
The southern Indian states were especially affected by deficit rainfall in FY2023, impacting the Kharif season and thus leading to low tractor sales.