FREE

Event update: Automobiles - January 2018 – low base aids growth

In January 2018, all automobile companies registered strong volumes, albeit on a low base (demonetisation impacted volumes in January 2017). Barring Maruti (that was affected by a shift in production of Swift and a high base), all other companies reported strong double-digit growth across segments. Among two wheelers, Eicher Motors surprised with production rising 16% mom – an indication that the transition to a new manufacturing plant is likely complete. M&HCV vehicles slowed slightly compared to December 2017; however, volumes remained strong, considering a degree of pre-buying in December on regulation changes.

Passenger vehicles (PV) – Maruti (MSIL) volumes moderate, while M&M posts strong growth on a lower base: Maruti reported 4.8% yoy growth in overall volumes at 151,351 units. Domestic volumes were up 5% yoy while export volumes grew marginally by 2.8% yoy in Jan 2018. Volume growth was partially impacted by the change in production of Swift (the new Swift facelift will be introduced shortly). Unlike other automobile companies, we note MSIL registered strong growth in January 2018. Tata Motors’ (TTMT) domestic PV segment surged 55% yoy, aided by new product launches (Nexon, Tigor). M&M’s Utility Vehicles (UV) segment grew by 16% yoy, primarily due to a lower demonetization base.

Two-wheelers (2W) - Royal Enfield (RE) volumes bounce back on production ramp up post recalibration; TVS volumes grow on a lower base: RE volumes at ~77,878 units rebounded with a 36% yoy growth (+16% mom). We note while RE was recalibrating its production in November and December 2017, production normalized in January 2018 with strong growth in capacity ramp up. TVS recorded overall 31% growth, albeit on a low base.

Commercial vehicles (CV) – Robust growth on a low base: M&HCV volumes moderated but registered robust growth while positive momentum in LCVs continued. Ashok Leyland’s volumes grew 22% yoy, led by 13% yoy growth in M&HCVs, supported by 58% growth in LCVs. TTML’s domestic CV volumes grew 38% yoy while VECV grew by 50% yoy.  It is noteworthy that the growth comes despite pre-buying in December 2017 due to the introduction of air vents that raised the cost of the vehicles by 1-2%.

Tractor volumes strong: M&M’s domestic tractor volumes grew 40% yoy, while Escorts reported 47% yoy volume growth. We estimate double-digit demand growth in 4QFY18.

Positive surprises: Strong tractor volumes; Ramp up in RE production.

Negative surprises:  Slower-than-expected M&HCV growth.

Our view: We estimate strong demand growth over the next few months on a low base due to demonetisation (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.