Auto sector pent-up demand impacted from high fuel cost

Auto pent-up demand has been impacted from high fuel cost as well as price hikes taken by OEMs in the current unlock phase vis-a-vis last year.

Accordingly, '2W' demand has been tepid while that of 'PVs' is more resilient, given the relatively better income profiles of car customers. 

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"In the current unlock phase, the pent-up demand is lukewarm (unlike last year) as customer sentiment has been partially impacted by higher fuel prices - petrol prices are more than INR 100 in several states, which has resulted in high running costs and price hikes taken by the OEMs to offset rising commodity prices," said HDFC Securities. 

"Further, demand in the rural segment has not been as resilient as that in the previous year, with 2W OEMs reporting flattish sales in Jun-21. However, demand for PVs is holding up (as the higher income consumers have been relatively less impacted by Covid)." 

The progress of the south-west monsoon will be a key variable to determine the extent of recovery, the brokerage firm said. 

Besides, firm pointed out that commodity prices have remained firm, with OEMs raising prices to partially offset the above. 

"Further, the sudden outburst of the Covid wave in Apr-May 2021 had resulted in temporary production shutdowns, which will impact profitability this quarter." 

Furthermore, the firm expects limited room for EPS upgrades, going ahead, due to elevated growth expectations and margin headwinds on the back of firm commodity prices. 

"Consequently, the auto index is expected to perform in line with the broader market. We reiterate our preference for stocks that have a diversified geographic presence - Bajaj Auto, Tata Motors and Bharat Forge," the brokerage firm said. 

"We also have a 'Buy' on Maruti amongst the domestic-centric OEMs due to its product portfolio comprising alternate fuel variants (CNG and upcoming hybrid models)."