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Event update: Automobiles; June 2018 – A smooth ride

Volume growth in June 2018 reflected strong underlying demand coupled with a low base for some companies (June 2017 volumes were impacted by GST implementation). The sharp variance in growth rates of companies reflected the different base levels - in June 2017 some players chose to delay dealer billings on account of GST concerns (Bajaj Auto, Maruti Suzuki, CV players), while others continued with normal despatches. On the whole, momentum was reasonably strong, with rural demand likely recovering. Going forward, we would watch for impact on volume growth from higher fuel prices and rising interest rates.

PV – Maruti (MSIL) reports strong volumes on plant ramp up and lower base; soft growth in M&M’s UV sales: MSIL’s overall volumes grew 36% yoy to 144,981 units. Domestic volumes were up 45% yoy while export volumes declined 29% yoy. Newly launched models in the compact segment drove the growth - the new Swift coupled with the new Dzire boosted demand. Tata Motors’ (TTMT) domestic PV segment continued its upward momentum, having surged 63% yoy, aided by strong Tigor sales in the car segment and AMT version of Nexon in the utility vehicle (UV) space. M&M’s UV segment saw a soft 7% yoy growth. We expect a pick-up UV growth in 2HFY19 on new launches. Hyundai India’s total volumes also grew 19% yoy.

2W – Steady growth; rural demand could be recovering: Royal Enfield (RE) volumes saw steady 18% yoy growth to ~74,477 units. Volumes were steady month on month, given the ramp up in the new Chennai plant–management expects to de-bottleneck some of the incremental capacity – this should be visible in H2. Growth in TVS volumes was steady at 15% yoy, led by 15% growth in motorcycles and 14% growth in scooters; growth in mopeds moderated to 5% yoy. Growth momentum in TVS’ exports continued, as the company entered new markets and expanded in existing ones. Bajaj Auto’s domestic 2W volumes jumped 86% yoy, led by entry-level motorcycles and strong growth in Pulsar/refreshed Discover. The base too was highly favourable (volumes fell 23% in June 2017).

CV – growth momentum continues: Growth momentum in M&HCV continued on the back of shift to higher tonnage vehicles and continued growth in the infrastructure segment. The e-commerce sector and improved thrust on agriculture boosted LCV volumes. Ashok Leyland’s volumes grew 28% yoy, led by 22% yoy growth in M&HCVs, supported by 45% growth in LCVs. TTML’s domestic truck volumes grew 81% yoy on strong demand from both M&HCVs and LCVs. VECV volume growth was strong at 63% yoy, led by rebound in the bus segment on (higher orders from schools) and growth in LMD.

Tractor growth stable: M&M’s domestic tractor volumes grew at a steady 22% yoy, while Escorts volumes jumped 72% yoy. Apart from strong rural demand post a normal monsoon, tractor demand may also be benefitting from a revival in the construction/infrastructure sectors.

Positive surprises: Stronger-than-expected growth in CV volumes

Negative surprises: Low UV volumes for M&M

Our view: With infrastructure spend increasing and rural discretionary consumption showing strong signs of revival, we expect strong demand in FY19E. We would watch the impact of higher fuel prices and interest rates in the coming quarters. MSIL and Eicher Motors remain our top picks.