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Event update: Automobiles; March 2018 – Secular growth across segments

March 2018 saw strong growth across segments, boosted by robust domestic and export growth in two wheelers (2W) and three-wheelers (3W) along with continued momentum in commercial vehicles (CV) space. LCVs supported by M&HCVs fuelled the growth in CVs, steered by government’s push towards infrastructure development, restriction on overloading, road construction and mining activities along with increasing demand from e-commerce and FMCG applications. Volumes in passenger vehicles (PV) segment were steady while tractor volumes were on a roll.

PV – Maruti (MSIL) volumes steady, while growth in M&M’s utility vehicles (UV) moderates: MSIL’s overall volumes grew 15% yoy to 160,598 units. Domestic volumes were up 16% yoy while export volume growth moderated to 2% yoy in Mar 2018. Newly launched models in the compact segment drove growth. The new Swift commands a waiting period of 10 weeks with a strong order backlog. Tata Motors’ (TTMT) domestic PV segment surged 31% yoy, aided by new product launches (Nexon, Tigor). Growth in M&M’s UV segment moderated to 3% yoy.

2W – Strong growth across the board: Royal Enfield (RE) volumes grew at a steady 27% yoy to ~76,087 units as production at the new plant stabilised; we expect an uptick in volumes, once the plant ramps up in FY19. Hero MotoCorp (HMCL) registered 20% yoy growth, indicating signs of recovery in the rural market. TVS recorded strong 26% yoy growth in 2W, led by robust volumes in Apache . Bajaj Auto’s domestic 2W volumes disappointed as growth moderated to 5% yoy.

CV–LCVs on a roll; MHCVs strong: MHCVs registered strong growth led by stringent restrictions on overloading, replacement buying and shift to higher tonnage vehicles. This came despite some pre buying in Mar 2017 on a higher base. The ecommerce sector and increased thrust on agriculture and FMCG sectors boosted LCV volumes. Ashok Leyland’s volumes grew 20% yoy, led by 12% yoy growth in M&HCVs, supported by 58% growth in LCVs. TTML’s domestic truck volumes grew 37% yoy while VECV registered a steady growth of 28% yoy. 

Tractors on a high: M&M’s domestic tractor volumes grew 50% yoy, while Escorts reported 65% yoy volume growth. We estimate tractor demand to remain strong, going forward.

Positive surprises: 2W/Tractor/LCV volume growth

Negative surprises: Growth in M&M’s UV

Our view: We expect demand momentum to continue, given its upward trajectory since 2-3 months. With infrastructure spend increasing and rural discretionary consumption showing strong signs of revival, we believe FY19 would be a strong year for the industry. MSIL and Eicher Motors remain our top picks.