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Event update: Automobiles; July 2018 – A mixed bag

Automobile original equipment manufacturers (OEM) reported mixed trends for July-18. While 2-wheelers (2Ws) and commercial vehicles (CV) reported strong growth, wholesale volumes in passenger vehicles (PV) were weak due to a high base and changeover in models (Maruti Suzuki’s Ciaz). Recent price cuts (mainly by Bajaj Auto) and rural demand seem to have benefited growth in 2W, but Eicher Motors’ volumes were impacted by transporters’ strike. However, existing dealer pipeline aided CV volumes, which were strong in July 2018; we expect to see the impact of axle load increase in the coming months.

PV – Maruti’s (MSIL) volumes hit on higher base (GST restocking in Jul 2017); M&M UVs weak: MSIL’s overall volumes declined marginally by 1% yoy to 164,369 units. Domestic volumes were flat on account of a higher base due to restocking in Jul 2017 and run-off in Ciaz. Retail sales rose 25% yoy in July. Combined wholesale volumes for June and July 2018 were up 17% yoy. Tata Motors’ (TTMT) domestic PV segment continued its upward momentum, surging 63% yoy, aided by strong sales in Tigor in the car segment and supported by the AMT version of Nexon volumes in the utility vehicle (UV) space. M&M’s UV segment declined 7% yoy. We expect UV growth to pick up in H2FY19, on new launches. Hyundai’s domestic volumes too were flat yoy.

2W – transporter strike moderated growth in Royal Enfield (RE); other 2W volumes steady: RE volume growth disappointed at 7% yoy to ~69,063 units. Volumes declined 7% mom due to transporters’ strike. However, our discussion with management seems to indicate that production ramp-up continues. TVS’ volumes grew 18% yoy on the back of 28% growth in scooters and 11% growth in motorcycles. Moped growth moderated to 10% yoy.  Bajaj Auto’s domestic 2W volumes grew 22% yoy, partially due to the benefit of price cuts on CT100 and Pulsar. Hero recorded steady 9% yoy growth, led by rural demand – our channel checks suggest a stronger retail growth.

CV – growth momentum continues: Growth momentum in M&HCV continued, despite change in axle load norms, as the existing deal pipeline with dealers was intact. Our initial dealer feedback suggests weak order pipeline for the current month. E-commerce sector and increased thrust on agriculture boosted LCV volumes. Ashok Leyland’s volumes grew 27% yoy, led by 22% yoy growth in M&HCVs, supported by 42% growth in LCVs. TTML’s domestic truck volumes grew 18% yoy. LCVs continued to zoom with 38% volume growth. VECV volume growth was strong at 37% yoy, led by a rebound in the bus segment on school ordering and MHCV growth.

Tractor growth mixed: M&M’s domestic tractor volumes registered steady 20% yoy growth, while volume growth in Escorts moderated to 3.5% yoy. Apart from strong rural demand post normal monsoons, we believe a revival in the construction/infrastructure sectors too could be benefitting tractor demand.

Positive surprises: Stronger-than-expected CV volume growth

Negative surprises: Low UV volumes for M&M and Eicher Motors

Our view: Consumption growth, led by robust rural demand as well as pricing actions (particularly in the 2W space), will likely support volume growth in the 2W/PV space in the coming months. We will carefully monitor the effect of axle over loading on CV demand. MSIL and Eicher Motors remain our top picks.