auto stocks to buy | auto sector outlook: Are motown blues over? What to expect for auto in October & beyond? Kumar Rakesh explains

Kumar Rakesh, Associate Director, Equity Research, BNP Paribas says one should expect a much weaker set of auto sales numbers in September as half of the month came under the inauspicious Pitru Paksha where new purchases are nor made. Within that, the passenger vehicle industry has been moving towards low single-digit, flattish, sort of a number so far the financial year to date. That is largely a reflection of pent-up demand drying up and the wholesale demand adjusting to new levels.

Further, while a lot of dynamics has played out in the electric two-wheeler industry, a lot is yet to play out in the coming years as this penetration continues to move up. It would be fair to expect that the market share can continue to churn between the players.

What to expect for the monthly sales from September because passenger vehicles in have seen a bit of a dip down and a gradual one at that in the past few months.
Kumar Rakesh: In September, half of the month would have gone into a period which is called Pitru Paksha when not much consumption is done. So, for most of the segments of the automotive industry, we would expect a much weaker number.

Last year, bulk of it was in October and so there would be a base effect which will make the sales number look quite weak and hence I think that is something which investors would be preparing themselves for that there could be a weaker set of number coming into September that also implies that October month becomes quite critical for the industry because most of the festivals are falling in October and bulk of the festival demand will show up in the month of October instead of getting spread across September and October the way it was last year.

So, going into the September sales numbers, one should expect a much weaker set of numbers. Within that, the passenger vehicle industry which you spoke about has been moving towards low single-digit, flattish, sort of a number so far financial year to date if we see and that we think is largely a reflection of pent-up demand drying up and the wholesale and demand now adjusting to new levels.

It takes a few months for the automotive companies to gradually adjust their production and during that period of time, they typically end up with higher inventory which is what we saw in the industry as well and that they ended up with a little higher inventory and the discounting also has gone up. We are in a transition period in which the supply and demand is adjusting to new normal in the passenger vehicle industry.

The other thing I wanted to talk about specifically is tractors because the market is betting big on the sectors which are going to see a revival thanks to a normal monsoon and of course the rural economy making a comeback. So, specifically for the farm division of Motown, what is your expectation?
Kumar Rakesh: At the start of the calendar year, we were seeing some weak numbers coming through in the tractors, but over the last few months we have started seeing improvement in the tractor numbers as well. We are getting into the new harvesting season, August, September, October typically is a stronger month for tractor demand and these months would be critical to gauge how strong the recovery has been and we would be looking very closely at the numbers. But it would be fair to expect that we have made single digits sort of a growth for this financial year should be doable for the tractor segment and some initial signs or indications of that should start reflecting in the coming months as well.In the second half, the base also starts becoming a little more favourable and that should also help the tractor sales growth numbers.What is the outlook on the Ola Electric IPO given the kind of investor interest that we have seen and the response which has been phenomenal. What does it mean for the upcoming IPOs within the space and of course for the existing players?
Kumar Rakesh: We think that the electrification in the two-wheeler industry is a structural trend and we have seen the indications of that whenever the incentives have been removed and the immediate following month while penetration fell, but with every passing month the penetration has been improving. Even in September we saw that the penetration of electric two-wheelers has moved up. So, electrification definitely is a structural trend. There would, of course, be some level of consolidation which we have already seen in the industry and now some of the key players have come out as winners in that consolidation.

The market share within those is something which we will have to watch out closely because all said and done, the industry is only about 6-7% of the total two-wheeler industry. So, we have not reached the mass level, have not reached across-the-country driven electrification trend as yet and as that starts happening, there are far more traditional buyers for whom the resale value, the after-sales service, word of mouth, the traditional parameters for buying any vehicle matters far more and the companies which fare better in those parameters will possibly continue to maintain the share which we are seeing currently or possibly increase as well.

So, while a lot of dynamics has already played out in the electric two-wheeler industry, a lot is yet to play out in the coming years as this penetration continues to move up. It would be fair to expect that the market share can continue to churn between the players.

But who will be the eventual winner? Will it go towards the EV players eventually where a 5-7% change happens every year and then in 10 years there will be a stark difference or do you think the domination in ICE will continue? I have two examples here. What has happened to China and what is currently happening in other Asian countries? In China, EV is a success, in other Asian countries EV is not such a success.
Kumar Rakesh: There is a difference when you are talking about the rest of the market where there is passenger vehicle electrification. In India, we are talking about the two-wheelers electrification in this conversation and the two-wheelers do not have so much of dependence on the charging infrastructure or the price difference between an ICE and EVs are not as high as it is in passenger vehicles and that is why the structural trend towards electrification for the two-wheeler should continue.

There is an argument and debate about what that means by 2030. We think that the electrification of two-wheelers would still reach only about 30%, which could be conservative by some standards, but that trend will definitely be structural. We have already seen a large part of the consolidation of the industry.

Some of the winners have already been established and what is not established as yet in our view is the market share between those players who would be having a better or lower market share than today, will be determined a lot by the kind of products which they are selling, the kind of service they are offering and the word of mouth which gets spread. These things will establish the resale value of the products. Those things are yet to be established in the industry.

How important is the importance of the rural economy for two-wheelers because it was thought that two-wheelers and the rural economy are connected to each other, but this year the rural economy has not recovered but two-wheeler sales have recovered. Two-wheeler sales have started recovering even pre-monsoon. The old theory which we have is that rural India has to do well for two-wheelers to do well and for rural India to do well monsoon has to be great.
Kumar Rakesh: That is a very good observation actually. The demand recovery started off from last festival season itself. We have seen almost a year of stronger two-wheeler demand while the rest of the parameters for the rural economy may not be indicating similar strong buoyancy and we think the answer lies in the financing.

Over the last one, one-and-a-half years, two-wheeler financing has dramatically increased and that has increased the addressable market for two-wheelers and in any of the segments wherever the financing has gone up, we have seen strong demand. Smartphones are one of the examples for that. We think that is one of the drivers which has driven the strong growth.

I am not saying that it is a driver which cannot sustain, but that is definitely something which has dramatically aided to the volume growth which we are seeing in the industry and the decoupling which you are talking about.