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Event update: Automobiles; January 2019 – Weak start to the year

Automobile volumes slowed across segments in Jan 2019. PVs were largely flat while 2Ws/CVs continued their declining trend. Notwithstanding the continuing weak underlying trends, wholesale volumes in PVs were better on account of lower dealer inventory (~3 weeks) compared to 2W (~6-8 weeks). M&HCVs performed better mom in January on a low base and inventory push by a key player, in our view. On the whole, weakness in the industry continues.

PV – Weak festive season led to slowdown in PVs: Overall, PV volumes remained flat in Jan for both passenger cars as well as UVs. Maruti Suzuki (MSIL) reported overall flat volumes at ~152,000 units, with marginal improvement in the domestic market but 11% yoy decline in exports on account of issues in specific countries, notably Indonesia. A sharp decline in Ciaz volumes (down 42% yoy) also impacted domestic volumes, as the company looked to clear inventory ahead of the launch of its upgrade. On the other hand, 31% yoy growth in the LCV/Van segment continued with the trends in the past year. In the month, M&M’s UV volumes were flat yoy, despite despatches of the new Marazzo, as the Bolero likely witnessed weakness. Tata Motors’ (TTMT) PV volumes fell 11% yoy (significantly lower than YTD growth rates), which the company attributed to weak sentiments.

2Ws volumes remain subdued; inventory correction underway: Hero MotoCorp (HMCL) reported ~9% yoy decline in volumes, with Honda Motorcycle volumes falling 19% yoy and TVS Motors’ domestic volumes remaining flat. Bajaj Auto, however, registered strong growth (domestic motorcycles up 15%), as the benefit of price cuts is still visible. While the demand in rural discretionary continues to remain weak and regulation-linked price hike are pressure points, degree of dealer inventory correction (current dealer inventory though remains at 6-8 weeks) could impact wholesale volumes. Royal Enfield volumes at ~73,000 units fell 7% yoy. We note this is a sharp jump mom (+25%) and may reflect seasonal factors.

CV – Sharp decline in M&HCV volumes; LCV moderates: Overall, M&HCV volumes registered single-digit decline. Although degrowth is lower than in Dec, the same could be because of a low base (change in regulatory norms led to pre-buying in in Dec 2018). M&HCV volumes for TTMT fell by 9% yoy, M&M by 19% yoy, and VECV HD segment 35% yoy. Only Ashok Leyland posted 8% yoy growth possibly on  inventory accretion with dealers. We believe weak operator profitability/overcapacity in the system will continue to impact the M&HCV segment. Notably, LCV growth also moderated.

Tractors recover: While M&M’s domestic tractor sales grew 2% yoy, Escorts recorded 12% volume growth.  Growth in Q4 is likely to be weak partially on account of a low base.

Positive surprises: Volume growth in Ashok Leyland

Negative surprises: Sharper-than-expected decline in 2W 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 few headwinds (interest rates/fuel price) may ease a bit, we expect weakness to continue into Q4. MSIL/Eicher Motors remain our preferred bets on expected long-term competitive advantages.