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Event update: Automobiles - December 2017 – growth on a low base

In December 2017, all automobile companies registered strong growth volumes, albeit on a low base (demonetisation impacted volumes in December 2016). While growth was visible across segments, CVs rebounded extremely sharply, partially as a certain degree of pre-buying was visible, given that regulations on air vents (that could raise vehicle prices by 1-2%) kick in from January. We believe stronger yoy demand growth in rural India, particularly North India (most affected by demonetisation), will benefit the commuter motorcycle market.

Passenger vehicles (PV) – Maruti and Tata Motors post strong volumes; M&M volumes decline: Maruti reported 10% yoy growth in overall volumes at 130,000 units. Domestic volumes were up 12% yoy while export volumes fell 6% yoy in Dec 2017. New launches (Dzire and Baleno), as indicated by high waiting periods, supported the strong domestic demand. Increased capacity from Gujarat plant too aided growth. Tata Motors’ (TTMT) PV segment posted 31% yoy domestic volume growth aided by new product launches (Nexon, Tigor).M&M’s Utility Vehicles (UV) segment declined 9% yoy, despite a lower demonetization base.

Two-wheelers (2W) – Sharp growth on low base due to demonetization; Royal Enfield (RE) production ramp up slower than expected: Hero MotoCorp (HMCL) reported 43% yoy volume growth to over 472,000 units. The growth was on a low base (volumes were down 34% in Dec-16 due to demonetization). RE at ~66,968 units was up 17% yoy but fell 5% mom. We note that RE is recalibrating its production capacity and is expected to ramp up its capacity to ~75,000 units per month in March 2018. Domestic motorcycle volumes for Bajaj Auto grew at a marginal 6% yoy despite a lower base. However, this was partially made up by strong growth in three wheeler (3W) domestic and export volumes. TVS recorded an overall 39% growth on a low base - motorcycle segment was up 64% yoy while scooter volumes rose 50% yoy.

Commercial vehicles (CV) – Strong growth on a low base: M&HCV volumes registered strong growth while positive momentum in LCVs continued. Ashok Leyland’s volumes grew 79% yoy, led by 82% growth in M&HCVs and supported by 70% growth in LCVs. Tata Motors’ domestic CV volumes surged 62% yoy while VECV grew 50% yoy. CVs are benefiting from a low base (In Dec 2016 TTMT’s M&HCV volumes fell ~10% yoy). Additionally, there was pre-buying in Jan 2018 due to change in regulations for air vents (that could lead to prices rising by 1-2%).

Tractor volumes strong: M&M’s domestic tractor volumes grew 32% yoy, while Escorts reported 30% yoy volume growth. We estimate double-digit demand growth in H2.

Positive surprises: Strong M&HCV volumes

Negative surprises:  Weak domestic 2W volumes for Bajaj Auto; RE’s slower-than-expected ramp up.

Our view: We estimate strong demand growth over the next few months on the demonetisation low base (Dec 2016-Jan 2017). In addition, with rural pockets (particularly in North India) reviving and near normal (but with a negative spatial dispersion) monsoons, rural discretionary consumption expenditure will be key. Maruti Suzuki and Eicher Motors remain our top picks.