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Event update: Automobiles; April 2019 sales - Weak start to the year

Automobile volumes continued to slow in April 2019, despite a positive change in the festival season (Gudi Padwa was in April in 2019 versus March in 2018). The weakness was felt across all segments – 2Ws, PVs and CVs - perhaps a reflection of weak macroeconomic-induced sentiment (slowing GDP growth rates, lingering high fuel prices) and regulatory issues (higher insurance costs/ABS). The sharp slowdown in the 2W and tractor spaces seems to underline the stress in rural markets. We expect the slowdown in the sector to continue at least in the near term, due to the imminent election season.

PV – Weakness continues: PV volumes in both the car and UV spaces declined. Maruti Suzuki (MSIL) reported overall volumes at ~143,000 units (down 17% yoy), with the domestic market witnessing degrowth of 19% yoy. While the performance of Ertiga remains strong, there was a sharp slowdown across other segments (compact + mini segment declined by 22% yoy, while the van space fell 27% yoy). Apart from weak sentiments, the yoy volume decline also reflects a high base and the discontinuation of the Omni (~5,000-6,000 per month). M&M’s UVs also registered ~8% decline during the month, despite the launch of XUV3OO. During the month, Tata Motors’ (TTMT) PV volumes too slid 26% yoy, which the company attributed to weak sentiment in the economy.

2W volumes remain subdued; inventory remains high: Hero MotoCorp (HMCL) and Eicher Motors reported ~17% yoy decline in volumes. On the other hand, TVS Motors and Bajaj Auto saw their domestic 2W volumes rise by 1% and 3%, respectively. The weakness in volume growth reflects the impact of regulatory prices hikes with the wedding season bringing little cheer to the 2W segment. Despite the weak performance, inventory days remained high.

CVs – Decline in M&HCV volumes continues; LCV moderates: Overall, M&HCV volumes continued to be weak; M&HCV truck volumes fell 33% yoy for TTMT, 48% yoy for M&M, while VECV HD segment was down by 9% yoy. However, Ashok Leyland’s domestic M&HCV truck sales rose by 8% yoy – our channel checks suggest increase in dealer inventory in the recent past. We believe weak operator profitability/overcapacity in the system will continue to impact the M&HCV segment. Notably, LCV growth also moderated significantly.

Tractors remain weak: While M&M’s domestic tractor sales fell 8% yoy, Escorts recorded 15% volume growth. Despite a change in the timing of the festival season (Gudi Padwa fell in April 2019 versus March in 2018), volumes were tepid, reflecting a high base and a distinct slowdown in the rural economy with weak rabi sowing.

Positive surprises: Ashok Leyland’s volume growth

Negative surprises: Sharper-than-expected decline in MSIL and TTMT’s volumes

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 the pressure a bit, we expect the weakness to continue into Q1. MSIL/Eicher Motors remain our preferred bets on thier long-term competitive advantages.