Automobiles Replacement demand to support growth recovery

Our analysis suggests strong downside support to auto demand in the medium term from replacement demand; we expect double-digit volume growth to be sustainable even in a modest economic growth scenario.

17 Jul 2020

Based on our forecasts, replacement demand could account for about 70% of demand in FY22/23

Source: SIAM, UBS estimates

This chart illustrates replacement and additional auto demand from financial year 2010 through estimated financial year 2025.

Auto demand remains in early stages of recovery

Auto demand remains in the early stages of recovery after two years of weakness (since Q2FY19) with improvements in June looking promising. Our channel checks with two-wheeler (2W) dealers indicate our caution on financing has not materialised. We believe margins have the scope for upside surprise in FY22, driven by cost cutting and a recovery in demand. We therefore raise our target PE multiples for the sector to in line with three-year historical average. 

Registration data trend and 2W dealer checks – a cause for optimism

Original equipment manufacturer (OEM) commentary suggests bookings have bounced back sharply in June 2020. Our checks with 29 2W dealers indicates June 2020 demand surprised positively. Tier-2/3 cities are showing a growth trend, while tier-1 remains under pressure. Inventory levels are below average. 

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