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Automobiles: February 2019 sales – Weak trends persist

Automobile volumes continued to slow in Feb 2019. The slow growth was felt across all segments – 2Ws, PVs and CVs - perhaps a reflection of weak macro-economic induced sentiment (slowing GDP growth rates, lingering high fuel prices) and regulatory issues (higher insurance costs/ABS). We expect the slowdown in the sector to continue, due to the imminent election season.

PV – Weakness continues: PV volumes in both passenger cars and UVs remained flat in Feb 2019. Maruti Suzuki (MSIL) reported overall flat volumes at ~149,000 units, with the domestic market seeing marginal improvement but exports declining 20% yoy due to delayed shipments. While the new Wagon R and Ertiga were well received, there was visible slowdown across other segments. The Ciaz in particular remained weak with aggressive discounts by competitors. On the other hand, the LCV/Van segment continued its growth in line with the past year trend. In the month, Tata Motors’ (TTMT) PV volumes too were flat yoy, which the company attributed to weak sentiment in the economy. M&M however grew 16% yoy on the back of XUV3OO launch. Hyundai and Toyota too saw marginal decline in volumes.

2Ws volumes remain subdued; inventory remains high: Hero MotoCorp (HMCL) reported ~2% yoy decline in volumes, with TVS Motors’ domestic volumes remaining flat. Bajaj Auto, however, registered strong growth (domestic motorcycles up 9% yoy) during the month, as the benefit of price cuts remained visible; the growth rate however is significantly lower than that in the previous months. Royal Enfield volumes at ~63,000 units fell 14% yoy – a major disappointment post a relatively strong Jan 2019. The weakness in volume growth reflects the impact of regulatory prices hikes with the wedding season bringing little cheer to the 2W segment; inventory days continued to be high.

CV – Decline in M&HCV volumes continues; LCV moderates: Overall, M&HCV volumes registered a sharp decline. M&HCV truck volumes for TTMT fell 18% yoy, M&M by 17% yoy, and VECV HD segment by 13% yoy. Ashok Leyland posted flat volumes, likely an inventory accretion with dealers. We believe weak operator profitability/overcapacity in the system will continue to impact the M&HCV segment. Notably, LCV growth also moderated significantly, although the SCV segment seems to be reviving.

Tractors recover: While M&M’s domestic tractor sales fell 7% yoy, Escorts recorded 12% volume growth.  Growth in Q4 is likely to be weak, partially on account of a low base.

Positive surprises: Slower-than-expected decline in HMCL’s volumes.

Negative surprises: Sharper-than-expected decline in RE volumes and M&M tractor sales

Our view: The pressure on volumes persists on account of weak sentiment, regulatory changes (higher insurance/axle load norms) and liquidity constraints. Although few headwinds (interest rates/fuel price) may ease a bit, we expect weakness to continue into Q4. MSIL/Eicher Motors remain our preferred bets on expected long-term competitive advantages.