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Event update: Automobiles; February 2018 – Strong growth across segments

February 2018 saw strong growth across segments, particularly the commercial vehicle (CV) and two-wheeler (2W) segments, even though passenger vehicle (PV) volumes were steady. M&HCVs registered strong growth, on the back of stringent restrictions on overloading, replacement buying and demand for higher tonnage trucks boosted by infrastructure spend. New launches/refreshes coupled with a low base encouraged by the rural market led to growth in the domestic motorcycle segment. PV sales were steady with new launches driving company specific volumes.

PV – Maruti (MSIL) volumes steady, while growth in M&M’s utility vehicles (UV) moderates: MSIL reported 15% yoy growth in overall volumes at 149,824 units. Domestic volumes were up 14% yoy while export volumes rebounded with 25% yoy growth in Feb 2018 on a low base. Newly launched models in the compact segment drove growth. The new Swift commands a waiting period of 10 weeks with a strong order backlog. Tata Motors’ (TTMT) domestic PV segment surged 45% yoy, aided by new product launches (Nexon, Tigor). M&M’s UV segment moderated to 7% yoy.

2W – Strong growth across the board: Royal Enfield (RE) volumes at ~73,077 units registered steady 25% yoy growth, as production at the new plant stabilised; we expect an uptick in volumes. Hero MotoCorp (HMCL) registered 20% yoy growth, indicating signs of recovery in the rural market. TVS recorded strong 35% yoy growth in 2W, led by robust volumes in Apache and a low base. Bajaj Auto too saw a rebound in its domestic 2W volumes, registering 23% yoy growth, driven by refreshes of Discover, while export volumes continued their momentum with a sharp recovery in key markets.

Commercial vehicles (CV) – LCVs on a roll; Momentum in MHCVs continues: MHCVs registered strong growth led by stringent restrictions on overloading, replacement buying and shift to higher tonnage vehicles. LCVs volumes e commerce sector and an increased thrust in agriculture and FMCG sectors. Ashok Leyland’s volumes grew 29% yoy, led by 21% yoy growth in M&HCVs, supported by 63% growth in LCVs. TTML’s domestic truck volumes grew 36% yoy while VECV growth moderated to 25% yoy. 

Strong tractor volumes: M&M’s domestic tractor volumes grew 39% yoy, while Escorts reported 52% yoy volume growth. We estimate tractor demand to remain strong, going forward.

Positive surprises: 2W/Tractor/LCV volume growth

Negative surprises:  Growth in M&M’s UV

Our view: Even though the current volume growth is on a low base (the impact of demonetisation was still being felt on February 2017 demand), we believe overall demand still seems to be improving. With infrastructure spend increasing and rural discretionary consumption showing strong signs of revival, we believe FY19 could be a strong year for the industry. MSIL and Eicher Motors remain our top picks.