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With Chip shortage receding, is the worst over for Auto sector?

ICICIdirect Research 13 Dec 2021 DISCLAIMER
One minute view

What’s buzzing: With decline in Covid incidence and pick up in industrial activity in countries like Taiwan (Taiwan Semiconductor Manufacturing Co is the global leader accounting for over 50% chip manufactured globally), Malaysia (major player in chip packaging and testing) as well as Korea (Samsung market share in chip production pegged at ~15%) the semi-conductor production has gathered pace with leading OEM’s commentary suggesting improvement in chip availability and increasing vehicle production going forward.

Context: Global as well as domestic auto OEM’s have sounded alert on chip availability with JLR being the first auto OEM in our coverage sounding alert in July 2021. Followed suit was Maruti Suzuki in August 2021 indicating just ~40% of normal production for September 2021 with guidance increased to ~60% for October, ~85% for November and ~80-85% for December 2021.

 Our Perspective: Retail demand for automobiles particularly the passenger vehicle (PV) segment has been quiet robust tracking the need for personal mobility. Current channel inventory in the PV space is one of the lowest ever at <15 days. Domestic OEM’s were unperturbed over the chip availability issue in H1CY21 however in the latter half of the year the impact was widespread. With increasing production by the global chip players, its availability has certainly improved with full normalcy expected to be attained sometime in CY22E. This is amidst increasing electronic content in vehicles which support new age technology features. We view this as more of a supply chain led demand deferment situation in the PV space with underlying demand drivers intact for a healthy growth going forward. Certainly, worst of its impact is behind us with marginal commodity led gross margin compression (~50-100 bps in Q3FY22E), a only headwind in the near term. We continue to prefer companies which are pioneer in the new technology landscape like electrification as well as prudently managing supply chain issues under the broader ambit of new product launches in the SUV domain and market share gains.

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