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Event update: Automobiles; April 2018 – Strong beginning to the new fiscal

The strong volume growth in April 2018, though on a low base (April 2017 sales had been impacted by a shift to BSIV and demonetisation), seems to reflect an improvement in the underlying demand and a possible recovery in rural markets. Commercial Vehicle (CV) sales continue to benefit government’s push towards infrastructure development, restriction on overloading, road construction and mining activities.  While two wheeler (2W)/tractor sales benefitted from recovery in rural demand post normal monsoons, volumes in passenger vehicles (PV) segment remained steady, partially due to new product launches.

PV – Maruti (MSIL) volumes steady, driven by compact segment: MSIL’s overall volumes grew 14% yoy to 172,986 units. Domestic volumes were up 14% yoy while export volumes rebounded with 19% yoy growth. Newly launched models in the compact segment drove the growth - the new Swift currently has a waiting period of 10 weeks with a strong order backlog. Tata Motors’ (TTMT) domestic PV segment continued its upward momentum surging 34% yoy, aided by strong sales of Tigor in the car segment and supported by Nexon volumes in the utility vehicle (UV) space. Growth in M&M’s UV segment at 11% was partially driven by a refreshed version of the XUV 5oo.

2W – Strong growth on a low base; rural demand maybe recovering: Royal Enfield (RE) volumes grew at steady 27% yoy to ~76,187 units, as production at the new plant stabilised; we expect an uptick in volumes, once the plant ramps up in FY19E. TVS recorded strong 22% yoy growth in 2Ws on a low base, led by robust volumes in the motorcycle segment (helped by the newly launched Apache) while scooter volumes moderated to 10%. Bajaj Auto’s domestic 2W volumes grew 24% yoy, led by entry-level motorcycles, a strong marriage season and a low base (volumes in April 2017 fell 19% yoy).

CV – growth momentum continues: MHCVs registered strong growth, propped by stringent restrictions on overloading, replacement buying and shift to higher tonnage vehicles. The e-commerce sector and increased thrust on agriculture boosted LCV volumes. Ashok Leyland’s volumes grew 79% yoy, led by 98% yoy growth in M&HCVs, albeit on a low base (in April 2017 volumes fell by 42% yoy), supported by 45% growth in LCVs. TTML’s domestic truck volumes grew 126% yoy on strong demand from both M&HCVs and LCVs. VECV growth moderated to 28% yoy, as the bus segment declined by 21% yoy. 

Tractors on a high: M&M’s domestic tractor volumes registered steady 19% yoy growth, while Escorts reported 29% yoy volume growth. Apart from strong rural demand post a normal monsoon, tractor demand may also be benefitting from a revival in the construction/infrastructure sectors.

Positive surprises: Stronger-than-expected M&HCV volume growth

Negative surprises: No negative surprises

Our view: Even though volume growth is on a low base, it seems to reflect an improvement in the underlying demand trends. With infrastructure spend increasing and rural discretionary consumption showing strong signs of revival, we expect strong demand in FY19. MSIL and Eicher Motors remain our top picks.