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Event update: Automobiles - August 2019 sales plunge further

Automobile volumes worsened in August 2019 across all segments – Two wheelers (2W), passenger vehicles ((PV) and commercial vehicles (CV) – despite heavy discounts and festive season in South India (Onam) / West India (Ganesh Chaturthi). We believe this reflects weak macroeconomic-induced sentiment (slowing GDP growth rates, lingering high fuel prices), regulatory issues (higher insurance costs/ABS) and liquidity crisis. Much worse volumes in August versus July point to an intensifying slowdown. We expect the weakness to continue, at least in the near term. Measures taken by the government to ease liquidity could take time to be effective, in our view. A possible GST cut (as per media reports) could be a positive for the sector though.

PV – Weakness continues: PV volumes continued to slide in August in passenger cars and UVs. Maruti Suzuki (MSIL) reported 33% volume decline at ~106,400 units, with the domestic market reporting 34% fall. The compact segment declined by 24% with 37% fall in vans, whereas the SUV segment grew by 3.1% yoy and 22% mom on the back of new launch of XL6. The decline in the van segment was partially due to discontinuation of Omni. Tata Motors’ (TTMT) too saw PV volumes slide 60% yoy, which as per the company, was in a bid to control inventory, as retail was 42% higher than wholesale during the same period. M&M posted 32% yoy decline, despite the launch of the Marazzo and XUV3OO launches.

2W volumes remain stressed with continuing high inventory: Hero MotoCorp (HMCL) saw volumes decline ~22% yoy, while Bajaj Auto’s domestic motorcycle sales fell 13% yoy. Royal Enfield (RE) continued its weak trend, with volumes sliding more than 24% yoy to ~53,000 units. With 2W inventory continuing at elevated levels (55-60 days as per FADA). Given the BSVI volume deadline of Apr 2020, we see a distinct possibility of higher discounting being used to clear BSIV inventory in Q4, if sales fail to pick up during the festive season. Our channel checks suggest lacklustre interest among buyers, despite the onset of the festival season with Onam (Kerala) and Ganesh Chaturthi (North and West India).

CVs – Decline in M&HCV volumes continues; LCV moderates: CV volumes fell sharply, with TTMT reporting 58% yoy decline in truck volumes, M&M showing 69% yoy slide and 42% yoy drop in the VECV HD segment. We believe weak operator profitability/overcapacity in the system will continue to impact the M&HCV segment. Notably, LCV/SCV volumes, which grew at a strong pace, too registered volume declines, indicating higher stress levels.

Tractors remain weak: While M&M’s domestic tractor sales fell 17% yoy, Escorts recorded 16% yoy degrowth. Tepid volumes on a low base (due to difference in timing of the festival season) reflect a distinct slowdown in the rural economy.

Positive surprises: None

Negative surprises: Negative surprises across the board

Our view: The pressure on volumes persists on account of weak sentiment, regulatory changes (higher insurance/axle load norms) and liquidity constraints. While recent measures by the government could bear fruit over the medium term, weakness could continue in the near term. Given the upcoming BSVI demand, the festival season is critical, particularly for 2W companies with high inventory. MSIL/Eicher Motors remain our preferred bets on expected long-term competitive advantages.