Commercial vehicle recovery may gather speed in FY22, say analysts

Besides Ashok Leyland, a slew of auto component makers will likely gain from volume growth

After witnessing the sharpest decline in volumes across all auto categories for the last two-and-a-half years, commercial vehicles are expected to see a reversal in fortunes. 

Volumes have seen a steady improvement on a sequential basis and this is evident with Tata Motors, India’s largest CV maker, reporting 17 per cent growth in volumes to 32,869 units in December 2020, as compared to 27,982 units in November. 

Ashok Leyland reported a 14 per cent jump in wholesales on a year-on-year basis last month. This trend can improve in the coming quarters for various sub-segments within the commercial space, say analysts. 

Segments, such as pick-ups and light commercial vehicles, have been the first to recover, aided by a healthy rural economy, higher demand from e-commerce companies, and attractive financing options, said Vishal Srivastav, research analyst, Edelweiss Research. 

On the other hand, medium & heavy commercial vehicles (M&HCVs) are seen catching up from FY22 onwards after declining sharply last year. Analysts at Ambit Capital estimate volumes to increase at a compound annual growth rate of 31 per cent over FY21 to FY25. The revision in volumes comes after multiple headwinds, such as axle load enhancement, steep price hikes following the transition to BS-VI emission norms, and Covid-led disruption had aggravated sales amid a weak economic situation. 

With the worst is likely over for the industry, the domestic CV space is expected to commence its cyclical upswing from FY22 onwards primarily tracking increased freight movement, government thrust on infrastructure and mining activities, and continued demand for last-mile connectivity from e-commerce players, said Shashank Kanodia, auto analyst, ICICI Securities. 

However, this cyclical upturn is not just restricted to the listed original equipment manufacturers (OEMs) -- Ashok Leyland, Tata Motors, Eicher Motors, and Mahindra & Mahindra -- but is also expected to benefit the entire value chain, which includes component suppliers like JK Tyre, Apollo Tyres, Bharat Forge, Bosch, MM Forgings, Jamna Auto, Automotive Axles, and Wabco India.  

 While share prices have run up sharply in recent months, a potential re-rating for these companies as seen in the case of JK Tyre after its December quarter results augurs well for investors with a long-term holding period.

Ashok Leyland 

Part of the Hinduja Group, it is the second-largest player in the medium & heavy trucks segment in India, with a market share of 33 per cent. The company has enhanced its focus on the light commercial vehicle (LCV) segment and has been steadily gaining market share driven by multiple new launches. Given the strong recovery expected over the next few years, Credit Suisse estimates the company’s Ebitda to grow in the range of 17-18 per cent over FY22-FY23. Valuations, too, are not in the expensive zone.  

Bharat Forge 

On an average over the last 4 years, nearly 44 per cent of the company’s total domestic revenues come from the CV segment. Analysts at Emkay expect the company’s revenue from this segment to grow 71 per cent in FY22. “Our positive view is underpinned by BHFC’s leadership position in automotive forgings, focus on diversification, and an expected recovery in the core segments,” they said in a recent report. 

 Apollo Tyres

Apollo Tyres is the market leader in the commercial vehicle tyre segment with a 28 per cent market share. Pick-up in the OEM segment and robust replacement demand are likely to aid a turnaround in volumes for the company. Moreover, market share gains from the restriction on passenger car radial imports, widening distribution, and product launches should add to growth prospects, say experts.

Bosch 

The net profit estimates of India’s largest auto component company have been upgraded for FY22 to reflect the sharper-than-expected recovery in commercial and passenger vehicles, according to analysts at Motilal Oswal Research. The triggers for the company, which dominates the diesel engine space, will be a recovery in commercial vehicles, higher BS-VI content, and cost rationalisation measures, as well as the supply of two-wheeler electric vehicle components.