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Event update: Automobiles; August 2018 – subdued month on a high base/floods

Barring commercial vehicles (CV), automobile volumes were subdued in August. The below par volumes were largely on account of a high base (due to a shift in the festival season timing versus last year), accentuated by floods/heavy rains in parts of the country, notably Kerala. The impact was visible in car volumes – MSIL/M&M reported degrowth while HMCL/TVS/Eicher reported sub-2% volume growth in the domestic market. While M&HCV growth was strong (fear of price hike), we note, sustainability of high volumes could be challenging, given the stressed profitability of freight operators.

PV – Maruti (MSIL) volumes hit on higher base and Kerala floods; UVs weak for M&M: Overall PV volumes remained subdued largely on a high base (change in festival season timing) and heavy rains in Kerala. Kerala comprises 6-7% of the total PV market and August was the peak festival season for the state. With that background, MSIL’s overall volumes fell 3% yoy to 158,189 units with a similar decline in domestic volumes. Apart from the above factors, supplier issues impacted volumes in S Cross. M&M’s UV volumes too slid 2% yoy, despite despatches of the new Marazzo. TTMT’s car volumes rose 8% yoy (significantly lower than YTD growth rates), however, UV volumes, led by Nexon, were strong.

2W – volumes moderate across companies: 2-wheeler (2W) volumes too were subdued. Royal Enfield (RE) volumes disappointed with mere 2% yoy growth to ~69,377 units. RE was possibly the most impacted by floods in Kerala (RE derives ~11% of volumes from Kerala and has ~35% share in the state). HMCL’s reported 1% volume growth, while TVS’ domestic 2W volumes grew at a moderate 2% yoy. BJAUT’s domestic volumes grew 27% on (a) price cuts and (b) the announced tapering down of discounts on certain models.

CV – growth momentum continues; sustainability could be suspect: Growth momentum in MHCVs continued, in spite of change in axle load norms. Our channel checks suggest that volumes could have been supported by fears of a price hike in vehicles. The e-commerce sector and increased thrust on agriculture boosted LCV volumes. Ashok Leyland’s volumes grew 28% yoy, led by 25% yoy growth in M&HCVs and supported by 38% growth in LCVs. TTML’s domestic truck volumes grew 26% yoy  (M&HCV volumes up 15% yoy), despite the uncertainty on the applicability of change in axle load norms. LCVs continued to zoom with 31% volume growth. VECV volume growth was strong at 33% yoy, led by strong growth in heavy vehicles As highlighted in our recent notes, growth sustainability in H2 seems questionable, given the pressure on operator profitability.

Tractor growth weakens: M&M’s domestic tractor volumes grew 7% yoy, while volume growth in Escorts moderated to 6.3% yoy, largely due to the change in the timing of the festival season.

Positive surprises: Stronger-than-expected CV volume growth

Negative surprises: Low PV/2W volumes

Our view: While August was a weak month on account of floods/change in the timing of the festival season, we expect the festival season to be robust on the back of revival in the rural economy and signs of an improvement in customer discretionary spend. M&HCV growth could face pressure in H2FY19, once the new axle load norms are implemented. Prefer MSIL (Outperformer) and Eicher Motors (Outperformer).