Commercial vehicle volumes to stay resilient as 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 hit in the automotive (auto) segment in the April-June quarter (first quarter, or Q1) quarter of 2022-23 due to a spike in raw material costs and moderating volumes.

The sequential margin drop for commercial vehicle (CV) players was a steep 290 basis points (bps). By comparison, margin compression was restricted to 40 bps for two-wheeler companies and 80 bps for passenger vehicle (PV) makers. The decline in margins for CV makers was due to weak seasonal volumes, points out Mansi Lall, research associate, Prabhudas Lilladher Research.

Sequential volumes of PV companies were flat, for two-wheelers higher by 11 per cent quarter-on-quarter, and for CVs 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 for the auto sector (in Q1FY23) has been under control and more than offset by price increases in most cases, except CV makers where steel sensitivity is higher.

CV companies will have to contend with higher raw material prices. Steel, however, has remained stable. Forging, casting, and tyre prices are on the uptrend and could impact margins. If the upward trend in prices persists and companies continue to be weighed under intense competitive pressure and discounts, the pressure on profitability could sustain for another quarter. What will remain critical, according to ICRA Ratings, is the inflationary trends in input costs and the ability of automakers to pass on the same to customers without adversely affecting demand.

In addition to movement in raw material prices, the Street will focus on the August volumes of CV makers to map demand trajectory.

Brokerages have a mixed view on wholesale and retail demand.

Motilal Oswal Research indicated that retails have been sluggish in August, given it is a seasonally weak month. The recent hike in interest rates has led to some adverse impact on demand. Further, M&HCV companies continue to offer discounts to corner market share, but the trend is expected to be transitory, they observe.

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

Basudeb Banerjee and Pratit Vajani of ICICI Securities say M&HCV retails have shown immense resilience in the monsoon season, clocking weekly levels of 5,500 units, aided by bus demand gradually recovering after Covid-19. 

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 in FY23, according to ICRA Ratings. 

Ashok Leyland is the top pick for most brokerages, with a target price of around Rs 180. From the current levels, this offers an upside of 22 per cent.

There are a few recommendations for Tata Motors, with target price between Rs 516 and Rs 650, translating into returns of 14-43 per cent from the current price.