Auto sales expected to grow YoY in Feb across segments, excluding 3-wheelers

"Demand momentum in January 2021 sustained in February 2021 across segments. Discounts were lower as February 2020 had BS-VI transition-related discounts. Inventory is much lower than normal for PVs and tractors, leaving headroom to fill inventory in the coming months. Wholesales are expected to grow for replenishing abnormally low inventory for PVs and Tractors," the brokerage said in a report.

The demand for entry-level two-wheelers models remained subdued, whereas the premium segment saw some recovery. Analysts expect the pain to continue till mid-April. Meanwhile, OEMs increased discounts for entry-level models to push sales.

The strong demand momentum continued in PV segment. However, retail sales were restricted by supply-side challenges, according to the report.

Amid CV segment, the demand for M&HCVs from the infrastructure segment remained strong. The cargo segment is also recovering, albeit slower than expected. Discounts have fallen by 2-3 percent to 13-15 percent due to strong demand and a shortage of certain models (in the high tonnage segment).

Meanwhile, tractor demand has sustained due to good rabi sowing and preference for farm mechanization. Both Mahidnra & Mahindra and Escorts are operating at full capacity.

"Sales remains skewed towards higher HP tractors due to higher demand from the agriculture segment and low base. Commercial use of tractors is also picking up. Dealers are holding lower inventory (10-30 days). We expect tractor volumes to grow by 30 percent/18 percent YoY for MM/ESC due to higher demand," Motilal Oswal said.

Current valuations are largely factoring in sustained recovery, leaving a limited margin of safety for any negative surprises. Motilal Oswal Financial Services prefers companies with higher visibility in terms of a demand recovery, a strong competitive positioning, margin drivers, and balance sheet strength.

Maruti Suzuki India and Mahindra & Mahindra are the brokerage’s top OEM picks. Among auto component stocks, it prefers Endurance Technologies and Motherson Sumi Systems.