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Event update: Automobiles; July 2019 sales – slowdown deepens

The weakness in automobile volumes exacerbated in July 2019 across all segments – 2Ws, PVs and CVs - perhaps a reflection of weak macroeconomic-induced sentiment (slowing GDP growth rates, lingering high fuel prices), regulatory issues (higher insurance costs/ABS) and liquidity crisis. The fact that July volumes fared worse than June sales indicates that the slowdown is deepening. We expect weak trends in the sector to continue, at least in the near term.

PV – Weakness continues: PV volumes in both, passenger cars and UVs, continued to decline in July. Maruti Suzuki (MSIL) reported 33% volume decline at ~109,000 units, with the domestic market reporting 34% fall. The compact/SUV/van segments each declined by ~38% yoy. The compact SUV space continued to show a decline of 38% yoy, despite the new Ertiga being well received. The decline in the van segment was partially on account of discontinuation of Omni. Tata Motors’ (TTMT) too saw PV volumes slide by 39% yoy, which the company attributed to the weak economic sentiment. M&M, posted 15% yoy decline, despite the launch of the Marazzo and XUV3OO launches.

2W volumes remain stressed; inventory remains high: Hero MotoCorp (HMCL) saw volumes decline by ~21%, TVS Motors’ domestic 2W volumes too slipped by 16% yoy while Bajaj Auto’s domestic motorcycle sales were down 15% yoy. Royal Enfield (RE) continues its weak trends, with volumes sliding more than 20% to ~54,000 units. Despite the decline in volumes, 2W inventory remained at elevated levels (55-60 days as per FADA). Given the BSVI volume deadline of Apr 2020, we see a distinct possibility of higher discounting to clear BSIV inventory in Q4, if retail demand remains weak during the festival season.

CV – Decline in M&HCV volumes continues; LCV moderates: Overall, CV volumes fell sharply, with 47% yoy decline in truck volumes for TTMT, 52% yoy slide for M&M, 46% yoy drop for the VECV HD segment and 47% fall in volumes for Ashok Leyland’s domestic M&HCV truck space. We believe weak operator profitability/overcapacity in the system will continue to impact the M&HCV segment. Notably, LCV/SCV volumes, which grew at a strong pace, too registered volume declines – an indication of the stress levels.

Tractors recover: While M&M’s domestic tractor sales fell 12% yoy, Escorts recorded 18% yoy degrowth. Tepid volumes reflect a high base and distinct slowdown in the rural economy.

Positive surprises: None

Negative surprises: Sharper-than-expected decline in M&HCV volumes, weaker-than-estimated MSIL volumes

Our view: The pressure on volumes persists on account of weak sentiment, regulatory changes (higher insurance/axle load norms) and liquidity constraints. Although a few headwinds (interest rates/fuel prices) could ease a bit, we expect the weakness to continue in the near term. Given the upcoming BSVI demand, the festival season is critical, particularly for 2W companies with high inventory. MSIL/Eicher Motors remain our preferred bets on expected long-term competitive advantages. Also, HMCL seems attractive at inexpensive valuations on the other end of the spectrum.