M&HCV recovery on back of replacement demand; 2Ws under pressure on weak rural demand
We expect demand momentum to pick up further pace in 2HFY16 on government reforms initiatives and on interest rate cycle turning favorable. Lead indicators of CV industry such as freight rates, fleet operators’ utilization and further correction in fuel prices are positive factors for CV. LCVs also are showing initial signs of bottoming out with moderate growth, passenger LCV has shown a growth of 9% YoY. 2W demand is slowing down, especially in rural markets, with motorcycle sales down 2% YoY in FY16YTD, while scooters continue grew at ~10%. Tractors (M&M) de-grew by ~13% in FY16YTD, impacted by deficient rainfall in most part of country.
Fuel price deflation and moderating interest rate to drive PVs and CVs demand
Fuel price deflation, currently at multi-year low, coupled with improving macro environment and new launches before start of festive season would help in reviving PV demand, especially for entry level cars and compact SUVs. While CV demand would be function of improvement in freight availability, however, improving fleet operators’ health (due to moderating cost pressures and improvement in demand) has kick started replacement cycle, which got deferred by 2-3 years. Product lifecycle key factor to off-set competitive forces Competitive intensity is expected to remain high across segments, especially in PVs and CVs, with several launches from challengers and incumbents. While volume recovery would be witnessed across segments, benefit of the same would differ from player to player depending on their product lifecycle and competitive intensity.
Valuation and view
Demand environment and changing competitive landscape in the auto sector would be the key determinants of stock performance. Prefer Maruti Suzuki, Bajaj Auto and Tata Motors in large caps and Ashok Leyland, Eicher Motors and TVS Motor in mid-caps.