From input cost to high demand, what's fuelling auto sector's growth?
Nifty Auto index has rallied by 24% YTD. Initially, we had a sceptical view regarding the sector’s outlook due to fading pent- up demand and high vehicle costs. However, lower input costs and price hikes have driven margin expansion leading to stable earnings growth.
The slowdown in China and weak global macroeconomics led the commodity price to decline. From this year’s high, China’s spot steel HRC prices is down by 13%. Similarly, spot LME zinc, copper, and aluminium are down 31%, 10%, and 18%, respectively, while palladium (key battery raw material) is down 32%.
In FY23, PV/2W/CV segments grew by 27%/17%/34% YoY, led by healthy demand and the low base of the previous year. Demand momentum is expected to continue, but at a slower growth rate in FY24 due to the higher base of FY23. PV: For FY24, SIAM estimates the PV industry to grow modestly between 5 and 7%.
ICRA expects 6-9% growth in FY24. The SUV segment is expected to grow at a higher pace than entry-level cars. 2W: In FY23, 2W domestic sales grew by 17% YoY to 15.9mn units (still much below the peak of 21.2mn units in FY19).
A low base in FY23 is expected to support growth in the domestic volumes of the 2W industry to the tune of 9% YoY in FY24. CV: In FY23, MHCVs grew by 49% YoY, and LCVs grew by 27% YoY. The industry expects the segment to grow at a high single-digit rate and a mid-single-digit rate in the LCV segment on a YoY basis in FY24.
Demand for passenger MHCV (buses) is expected to grow by ~30% YoY in FY24, led by replacement demand from educational institutions. And expect a similar growth momentum in FY25, thereby indicating the CV is on an up-cycle on a longish basis. This may be the best segment in the category, and investors interest is likely to
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