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Auto sector update: Are volumes approaching an off-the-cliff fall?

• Passenger car sales during 5MFY19 rose 1.0% YoY, which allowed listed automobile manufacturers to limit decline in volumes to 2.0% YoY during the period.
• Amid dismal volumetric performance by other vehicle categories (declines for LCVs, HCVs, Tractors and three wheelers ranged from -13% to -26%, while M/Cycles sales have remained flat), the outperformance of passenger car segment is likely to have been driven by 1) large order book at the start of the year, 2) pre-buying resulting from pre-announced and staggered price increases.
• That said, the delivery periods of ‘The Big-3’ OEMs have almost halved during 5MFY19, which indicates that new bookings are likely to have fallen steeply. Sep-18 customer advances fell 23% QoQ for INDU and 48% QoQ for PSMC.
• 1QFY19 gross margins have already taken a hit. From FY18 averages, gross margin fell 290bps for INDU to 14.5%, 330bps for PSMC to 6.6% and 550bps for HCAR to 6.4%.
• With FY19 volumes likely to have been concentrated in 1HFY19, there exists a big possibility that volumes could nose-dive at the onset of 2HFY19. With competition from new players set to increase in 1HFY20, the auto sector seems to be heading into a tumultuous year.
• We remain underweight on Autos as the sector faces several headwinds entering into to CY19 including rising competition, weak demand, and rising cost pressures.