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Event update: Automobiles; Dec 2018 – No New Year Cheer

Automobile volumes slowed in all segments, as weak sentiment and inventory correction (post the festival season) dampened demand. The downturn in commercial vehicle (CV) sales continued, as a convergence of factors (axle load regulation, tightening liquidity norms and weak operator profitability) impacted volumes in the space. In the passenger vehicle (PV) segment, inventory correction at the dealer end (a consequence of the weak festival season) offset the higher-than-usual year end discounts (benefitted retail volumes). 2W demand remained muted, partly on higher regulation-led price increases.

PV – Slowdown continues post festive season: Overall, PV volumes remained weak in Dec 2018 for both passenger cars as well as UVs. Slowdown reflects the weak demand in the festive season, which resulted in limited inventory push. Our dealer checks suggest that while wholesale volumes remained weak, retail volumes improved marginally (on high discounts), helping clear the high dealer inventory. Maruti Suzuki (MSIL) reported marginal decline (-1.3% yoy) in volumes at 128,338 units, as exports fell 36% yoy, while domestic volumes grew at a marginal 2% yoy to 121,479 units. M&M’s UV volumes fell 4% yoy despite despatches of the new Marazzo. Tata Motors’ (TTMT) PV volumes grew 1% yoy (significantly lower than YTD growth rates).

Regulatory headwinds slow 2W volumes; RE sees steep fall in volumes: Hero MotoCorp (HMCL) reported 5% yoy volume decline on muted consumer sentiment and high insurance costs. TVS’ domestic 2W volumes grew at mere 1% yoy, in contrast to the double-digit growth reported over last 6 months. Bajaj Auto’s domestic 2W was the only outlier with 39% yoy volume growth, perhaps due to steep cost cuts at the lower end of the pyramid and inventory push. Royal Enfield (RE) disappointed with volumes of 58,278 units (down 13% yoy). Management cited weakness on account of (a) increased vehicle prices (the ABS version of key models of the Classic 350 was introduced in Nov/Dec (b) Dec is generally a lean month due to change in the model year. Till last year customers would even purchase vehicles from the previous year to evade the waiting period. However, lower waiting periods have caused consumers to delay their purchase decisions to January. Management is hopeful of stronger volumes in Q4.

CV – Sharp decline in M&HCV volumes; LCV moderates: M&HCV volumes declined across companies, registering a second consecutive month of decline  – Ashok Leyland reported 29% yoy decline in M&HCV volumes; TTMT’s M&HCV trucks fell 16% yoy, while VECVs HD segment (including buses) slid 5% yoy. We believe tightening liquidity norms, weakening fleet operator profitability and excess freight capacity will continue to impact the M&HCV segment.

Tractor volumes decline: M&M’s domestic tractor sales declined 1% yoy, while Escorts’ volumes jumped 28% yoy. This does seem to indicate that M&M might losing market share in this space.

Positive surprises: None

Negative surprises: RE sales, M&M tractor volumes, sharper-than-expected decline in MHCV sales

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