CVs: Growth tapering, discounts returning in auto sector: IIFL Securities

29 Sep 2023 , 12:37 PM

The MHCV industry was in a high-growth phase in FY22 and FY23, with consecutive years of ~50% growth. Analysts of IIFL Securities currently forecast MHCV industry’s growth tapering down to 10-12% Cagr over FY24/FY25, and most likely peaking out there. MHCV SAAR in 1HFY24 averaged 370k, below analysts of IIFL Securities FY24 volume estimate of 400k. This implies that in order to meet the full year estimate, significant improvement is needed in H2FY24. Typically, the sector loses investor interest in the late stage of the cycle, as a down-cycle may be around the corner. However, in recent quarters, the industry has resorted to strong pricing discipline, which drove improvement in margins and renewed interest in the sector. Analysts of IIFL Securities perceived a risk to the sustainability of low discounts, if any of the larger players lost market share. This risk seems to be playing out now. With Tata Motors losing market-share in recent quarters, discount levels are increasing. This may pose a risk to the margin expansion thesis. Overall, analysts of IIFL Securities see risk to earnings, from both volume and margin perspectives. 

CV volume growth tapering; cycle peaking: 

MHCV volume growth has tapered from 50% in FY22 and 49% in FY23 to about 9% YoY in H1FY24. Analysts of IIFL Securities currently forecast industry growth of 10-12% in FY24/FY25, and see volumes peaking there. In previous MHCV upcycles (lasting 5-7 years), peak volumes have been 15-20% higher than the previous peak. In the current cycle, analysts of IIFL Securities forecast FY25 volumes at about 15% higher vs FY19 peak. However, in tonnage terms, analysts of IIFL Securities FY25 forecast is 27% higher than the previous peak. There is a high likelihood of FY26 seeing a down-cycle. LCV has been weak, with 1HFY24 being almost flat YoY. 

Sharp jump in MHCV SAAR required to meet FY24 estimates: 

Although MHCV volume growth of 9% in H1FY24 is close to analysts of IIFL Securities FY24 forecast of 12%, there is some easy base effect at play. In terms of SAAR (seasonally adjusted annualised rate), H1FY24 SAAR stood at about 370k. In order for the industry to clock FY24 growth of 12% (400k volumes), the SAAR needs to improve to 430k in H2FY24.

Fleet expansion may slow going into elections, DFC commissioning: 

Needless to say, fleet expansion is a capex decision. There may be some uncertainty in H2FY24, with respect to the fleet expansion decisions by freight operators. This may make it difficult for the MHCV industry to clock the sharp improvement in SAAR, needed to meet FY24 estimates. DFC (dedicated freight corridor) is likely to be commissioned fully by the end of FY24. This may have a one-time impact on road’s share in freight transport, and slow fleet expansion. Over the medium term, analysts of IIFL Securities expect rail to only maintain its freight market-share despite DFC, and hence, the impact on road may only be a short-term blip. 

Good pricing discipline seen in recent quarters: 

Since late 2022, truck makers displayed better pricing discipline by keeping a lid on discounting. This led to better gross margins and Ebitda margins for Tata Motors (CV) and Ashok Leyland. Although volume growth was coming off, pricing discipline and margin expansion drove EPS upgrades and renewed interest in the segment. However, discounting is re-surfacing due to market-share pressures: As highlighted in previous reports, the new-found pricing discipline would sustain, only if market-share ambitions take a backseat. Tata Motors’ MHCV market-share has come off from 53% in FY22 to 44% in Q1FY24. Ashok and Eicher have gained share over this period. Beyond a point, protecting market-share would become a priority, even at the expense of margins.