Maruti Suzuki, Hero MotoCorp may lead August sales amid doubts on long-term demand

The recovery in automobile sales is likely to continue in August even as concerns over long-term demand persist. Companies are not only meeting demand but are also building inventories in retail networks for the upcoming festive season.

The passenger vehicle industry is expected to return to the growth path in August after falling sharply in the last couple of months. Nomura Research and Motilal Oswal Financial Services Ltd analysts have projected double-digit growth in passenger vehicle sales, partly aided by a favourable base.

Two-wheeler sales are projected to almost reach the year-ago levels with the industry estimated to clock low single-digit decline or growth. Tractor sales are expected to continue the strong run.

Industry leaders Maruti Suzuki India Ltd (MSIL) and Hero MotoCorp Ltd are expected to lead the recovery. Maruti is estimated to clock double-digit sales growth. Hero is expected to post 8-10% growth, while domestic two-wheeler sales of Bajaj Auto Ltd, TVS Motor Co. Ltd and Eicher Motors Ltd are estimated to mimic the sector trends.

Social-distancing norms and limited availability of public transport are driving personal vehicles’ sales. Hero MotoCorp and MSIL have a wider presence and larger share of low-priced products in their portfolios and are witnessing faster recovery.

“Our industry interactions indicate that retail sales have largely come back to pre-covid levels in passenger vehicles, albeit on a low base. However, two-wheeler retail sales are still at ~80% levels. We expect the momentum to continue in September as well, but the base will be much higher, especially for passenger vehicles,” Nomura analysts said in a note.

Many people fear that once the pent-up demand ebbs, structural issues that had impacted sales in FY20 could return to haunt the industry. “At the moment, demand is very strong. However, beyond the next six months or so structural problems would come to the fore,” R.C. Bhargava, chairman, MSIL, said at an investor meet.

Transmission to Bharat Stage-VI (BS-VI) emission norms and the rise in insurance and state levies drove up vehicle acquisition costs for consumers. Income levels have also dropped and this poses a threat to medium-term sales. “Household income growth has slowed down considerably due to investment and job challenges,” Kotak Institutional Equities said in a note. “Automobile volume growth will require continuous increase in affordability over time through higher household income,” it said.

In short, these concerns may weigh on sentiments for auto stocks, which have appreciated quite a bit lately.