Sustainable demand in auto will start picking up in Q4

In December-January, the pent-up demand will end and then the real sustainable demand will start picking up in Q4, says Jay Kale, VP - Equity Analyst, Auto and Auto Ancillaries, Elara Capital.


What are your initial takeaways from the auto numbers and are the trends that you have picked up?
The auto industry is split between two-wheelers, four-wheelers, CVs and tractors. The trend on growth rates in terms of the retail momentum is different across different categories. The tractors side has been doing well and continued to do well during the festive season as well. Passenger vehicles fared the next best in terms of retail momentum, followed by two-wheelers. Commercial vehicles are recovering fast but still may be flattish to down on a year on year basis. That is the broader trend on the retail momentum during the festive season amongst different segments.

The wholesale numbers could show a different trend in terms of YoY growth purely because of the difference of inventory addition and depletion for different companies and different segments. But this is a pecking order in terms of the retail momentum we are seeing on ground.

Is there an expectation that that momentum will only build going forward and what are the factors for that?
The festive season did see some bit of pent-up portion. That had started coming in from August-September, carrying into the festive season as well. Of course, four-wheelers fared better than two-wheelers. Rural markets opened earlier than urban markets and hence the pent-up demand weaned off faster for two-wheelers than four-wheelers. In December-January, you should see the end of pent-up demand and then the real sustainable demand will start picking up in Q4. Here again, the trend for tractors would be much better than the other segments.

January-February-March would show real trackability of the health of the economy and hence retail momentum for each segment as the pent-up demand would largely be behind us in Q4.

Do you believe that now there will be no negative surprises and that we can see this traction follow through within the two-wheelers.?
Two-wheelers are also dependent on the incomes which have been steady till now. We have started seeing an opening up of the urban economy as well and that should to a certain extent slow down. Going forward, the marriage season is the next big kicker till December 15 and post that, with the harvest money coming in and the marriage season in the Jan to April-May kind of scenario. Two-wheelers will see softening till January and then momentum picking up from Feb-March once the marriage season starts kicking off.

We had seen them doing fairly well till October-November-December-January. I expect the momentum to soften and it should again pick up post February.

Do you sense that we are going to see a lot more promise within the rural sphere when it comes to auto sales as well?
Typically that has happened and that will continue. The tractor space is largely rural dependent, being extremely strong and inventory levels are among the lowest in the auto segments. This should kick in for two-wheelers as well. What happened was because of a very strong pent-up portion coming in August-September, the expectations for two-wheelers were running quite high. Once the pent-up demand settles down, we have seen some bit of softening over there which should normalise going forward.

Once the rural economy settles down and we have the core growth coming in, it should start picking up from February. But the next two-three months should be soft after which it should pick up. But the rural economy overall should outperform the urban economy and hence the tractors are doing much better than the other segments. It should be followed by two-wheelers as with exposure to rural India.