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Event update: Automobiles; March 2019 sales – A weak end to the year

Automobile volumes continued to slow in March 2019 across all segments – 2Ws, PVs and CVs - perhaps a reflection of weak macroeconomic-induced sentiment (slowing GDP growth rates, lingering high fuel prices) and regulatory issues (higher insurance costs/ABS). 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, given the imminent election season.

PV – Weakness continues: PV volumes in both passenger cars and UVs remained flat in March. Maruti Suzuki (MSIL) reported 2% decline in volumes at ~157,000 units, with a flat domestic market and a 12% yoy decline in the export market, given the weakness across segments. While the new Wagon R and Ertiga were well received, there was visible slowdown across most segments. Notably, the price sensitive van space (Omni/Eeco) showed growth (+20% yoy), possibly on account of pre-buying ahead of the ABS introduction. Tata Motors’ (TTMT) PV volumes too fell 12% yoy in Mar 2019 and the company attributed it to the weak economic sentiments. M&M, however posted 5% yoy growth on the back of XUV3OO launch.

2W volumes remain subdued; inventory remains high: Hero MotoCorp (HMCL) and Eicher Motors reported ~20% yoy decline in volumes, with TVS Motors’ domestic 2W volumes also reporting 10% decline. The weak volumes reflect the impact of regulatory price hikes, with the wedding season bringing little cheer to the 2W segment. The weak performance continues even as inventory with dealers remains at elevated levels.

CV – Decline in M&HCV volumes continues; LCV moderates: Overall, M&HCV volumes fell sharply, with 9% yoy decline in truck volumes for TTMT, 17% yoy slide for M&M, 26% yoy drop for the VECV HD segment and 8% fall for Ashok Leyland. We believe weak operator profitability/overcapacity in the system will continue to impact the M&HCV segment. Notably, LCV growth also moderated significantly, although the SCV segment seems to be reviving.

Tractors recover: While M&M’s domestic tractor sales fell 31% yoy, Escorts recorded 1% yoy growth. The tepid volumes reflect (a) a change in timing of the festival season (as Gudi Padwa fell in March in 2018 and will be in April in 2019), (b) a high base and (c) a distinct slowdown in the rural economy with a weak Rabi sowing.

Positive surprises: None

Negative surprises: Sharper-than-expected decline in 2W volumes and M&M tractor sales

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 in Q1. MSIL/Eicher Motors remain our preferred bets on expected long-term competitive advantages.