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Event update: Automobiles; June 2019 sales – No respite!

Automobile volumes continued to slow in June 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 sharp slowdown in 2W and tractor spaces seems to underline the stress in the rural market. We expect the slowdown 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 June. Maruti Suzuki (MSIL) reported 14% volume decline at ~124,000 units, with the domestic market reporting a 15% fall. The decline comes on a high base and was exacerbated by the discontinuation of the Omni (~5,000-6,000 units per month). The mini/compact segment declined ~20% yoy. Relatively, the compact SUV space showed resilience (down 7% yoy) with the new Ertiga being well received. Tata Motors’ (TTMT) too saw PV volumes slide by 27% yoy, which the company attributed to the weak economic sentiment. M&M, however posted 4% yoy growth on the back of the Marazzo and XUV3OO launches.

2W volumes remain subdued; inventory remains high: Hero MotoCorp (HMCL) volumes declined by 12%, TVS Motors’ domestic 2W volumes too slipped by 8% yoy while Bajaj Auto’s domestic sales were down by 1%. Royal Enfield continues its weak trends with volumes declining more than 20% to under 60,000 units. Weak volumes reflect the impact of regulatory price hikes, with the post-wedding season continuing to remain lacklustre. Dealer inventory remains at elevated levels.

CV – Decline in M&HCV volumes continues; LCV moderates: Overall, M&HCV volumes fell sharply, with 19% yoy decline in truck volumes for TTMT, 36% yoy slide for M&M, 36% yoy drop for the VECV HD segment and 19% fall for Ashok Leyland. 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 19% yoy, Escorts recorded 11% yoy degrowth. The tepid volumes reflect a high base and distinct slowdown in the rural economy with weak Rabi sowing.

Positive surprises: M&M’s UV sales

Negative surprises: Sharper-than-expected decline in Ashok Leyland’s M&HCV volumes

Our view: The pressure on volumes persists on account of weak sentiment, regulatory changes (higher insurance/axle load norms) and liquidity constraints. Although few headwinds (interest rates/fuel price) could ease a bit, we expect the weakness to continue for next few months. MSIL/Eicher Motors remain our preferred bets on expected long-term competitive advantages.