Kumar Rakesh, Associate Director, BNP Paribas, says in auto, “we should start aligning from a stock preference perspective and move to stocks which are still seeing demand, which can possibly offset the higher commodity pressure whereas the segments which are going to see demand pressure, will see far higher impact of any commodity stiffening.”
A month ago, auto stocks were at a relative high and with the exception of CVs, most of the auto stocks have retreated quite a bit. Given that there seems to be a change of trend in four-wheelers from sedan to SUVs, is this something which markets have already factored in because the recent outperformance in Mahindra & Mahindra and for that matter Maruti is clear indication of how markets are aligning to the new shift?
Early last month, we were saying that now is the time to start getting more selective in the auto space. So far in the year we have seen the entire auto space outperforming the broader index and that possibly will start changing as the demand patterns across different segments have started digressing quite significantly and that is something which the recent auto sales numbers are also indicating and possibly will continue for the rest of this fiscal year as well.
Investors have also started aligning themselves and it is not just the demand side of the equation which we have to be mindful of, also on the commodity pressure side is something which we have to be quite watchful. We maintain a commodity basket of all the commodities which goes into a typical passenger vehicle and two wheelers. It had been coming down so far in this year, but last month that also went up specifically because of steel prices going up.
If you listen to the commentary from the steel companies, they are talking about how the steel prices have started bottoming out and they expect steel prices going up in the coming months, possibly by the third quarter. If that starts happening, the margin side of the equation also will start getting more stressed.
We should rather start aligning from a stock preference perspective and move to stocks which are still seeing demand, which can possibly offset the higher commodity pressure whereas the segments which are going to see demand pressure, will see far higher impact of any commodity stiffening.
What is happening to the two-wheeler space? The numbers from Bajaj and other two-wheelers are pointing to a trend which is that the premium luxury bike will do well and the affordable luxury bike segment is where the competition will intensify. How long before the base effect will start kicking in?The entry segment of the two-wheeler industry over the last four years have seen a price increase of almost 40% and that is a very sharp price increase for different reasons. I am talking about the on-road prices for the insurance price increase. Then the emission law kicked in and the commodity prices went up. It obviously will have a price elasticity impact, something which we saw play out over the last two-three years and hence the overall industry volume, what peaked at 21 million in FY19, ended close to about 16 million last year and we believe this is largely a reflection of the price elasticity absorbing the higher prices.
From here on, we should be seeing a more normalised growth. If you look at the long-term average industry growth of 30-40 years, the industry has grown at about 8%. Given that we have a far higher number of two-wheelers in the market, the penetration is much higher. The growth would be much lower than what the long-term average of the industry has been.
Within that, the entry segment would be at much lower than that and the premium segment wher there is much higher competition, we will see a higher growth and possibly that is why we are seeing a much higher competition as well because most of the OEMs are realising that the industry is premiumising and the demand is shifting towards those segments and also the affordability of the consumers in that segment is better and price elasticity is less compared to the entry segment.
What about dual plays like Bajaj Auto, which has a bit of domestic and a lot of export demand. What happens there?
Because of the diversification the company has, they definitely benefit to some extent. But when we look at the overall automotive basket, in segments like commercial vehicles we are still seeing a strong upcycle; passenger vehicles where the demand is far more resilient and the long-term structural growth story is there because penetration is still quite low for passenger vehicles in the country. Those companies would be better placed. But within the two-wheeler basket, companies with a more diversified portfolio will be better off.
