CV volumes to stay resilient as demand recovery takes hold in FY23

Margin pressures may continue on competitive pressures, input cost inflation

Medium and heavy commercial vehicle (M&HCV) makers were the worst impacted in the auto space in the June (Q1FY23) quarter due to a spike in raw material costs and moderating volumes. The sequential margin drop for commercial vehicle players was a steep 290 basis points. In comparison, margin compression was limited to 40 basis points for two wheeler companies and 80 basis points for passenger vehicle makers. The decline in margins for CV makers was due to weak seasonal volumes, points out Mansi Lal of Prabhudas Lilladher Research.

While sequential volumes of passenger vehicle companies were flat and those for two-wheelers were higher by 11 per cent QoQ, commercial vehicle volumes fell 10 per cent sequentially to 220,000 units. The fall for M&HCVs was much higher at 19 per cent for the quarter.

In a report earlier this month, analysts at Motilal Oswal Research highlighted that raw material cost increase of the automobile sector (in Q1FY23) has been largely under control and more than offset by price increases in most cases  except commercial vehicle makers where the steel sensitivity is higher.

Going ahead, CV companies will have to contend with higher raw material prices, barring that of steel, which has remained stable. Forgings and castings, and tyre prices are on the uptrend and could impact margins. If prices stay on the upward trend and companies are unable to pass them on amid intense competitive pressure and discounts, the pressure on profitability could continue for at least one more quarter. What would remain critical, according to Icra Ratings, is the inflationary trends in input costs and ability of auto makers to pass on the same to customers without adversely affecting demand.

In addition to the movement in raw material prices, the street will focus on the August volumes of the commercial vehicle makers to map the demand trajectory. Brokerages have a mixed view about wholesale and retail demand. Motilal Oswal Research indicated that retails have been slow in August as it is a seasonally weak month. The recent hike in interest rates has had some adverse impact on demand. Further, M&HCV companies continue to offer discounts to gain market share but the trend is expected to be temporary, they add.

Most brokerages expect sector volumes on a low base to be higher by over 40 per cent YoY in August. While volume growth for Ashok Leyland is likely to be in the 55-70 per cent range, that for Volvo Eicher Commercial Vehicles would be about 29 per cent. Market leader Tata Motors is expected to end August with volume growth of 29-39 per cent YoY.

Basudeb Banerjee and Pratit Vajani of ICICI Securities say that M&HCV retails have shown immense resilience in the rainy season, clocking weekly levels of 5,500 units, aided by bus demand gradually recovering post-Covid. Combined CV volumes, which grew 87 per cent for the first four months of the financial year, are expected to grow 12-15 per cent FY23, according to Icra Ratings.

Ashok Leyland is the top pick for most brokerages, with a target price of around Rs 180, which from the current levels offers an upside of 22 per cent. There are a few recommendations for Tata Motors with the target price in the range of Rs 516-650. This translates to a return in the range of 14-43 per cent from the current price.