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Event update: Automobiles; May 2018 – Strong momentum continues

The growth momentum in May 2018 remained strong. Even though the growth rates benefitted from a low base (May 2017 sales had been impacted by a shift to BSIV and GST anticipation), nonetheless, the volume uptick seems to reflect an improvement in the underlying demand and a possible recovery in rural markets. Besides marriage a strong marriage season also pushed demand for PVs and 2Ws. Commercial Vehicle (CV) sales continue to benefit government’s push towards infrastructure development, road construction and mining activities.  While two wheeler (2W)/tractor sales benefitted from recovery in rural demand post normal monsoons, volumes in passenger vehicles (PV) segment was led by Maruti’s strong show (new launches).

PV – Maruti (MSIL) reports strong volumes on plant ramp up, Muted UV sales from M&M: MSIL’s overall volumes grew 26% yoy to 172,512 units. Domestic volumes were up 25% yoy while export volumes rebounded with 48% yoy growth. Newly launched models in the compact segment drove the growth - the new Swift currently has a waiting period of 10 weeks with a strong order backlog. Tata Motors’ (TTMT) domestic PV segment continued its upward momentum surging 61% yoy, aided by strong sales of Tigor in the car segment and supported by Nexon volumes in the utility vehicle (UV) space. Growth in M&M’s UV segment disappointed with flat volumes.

2W – Steady growth; rural demand maybe recovering: Royal Enfield (RE) volumes grew at steady 23% yoy to ~75,000, units; we expect an uptick in volumes, once the plant ramps up in FY19E. TVS growth momentum slowed down to 8% yoy as motorcycles growth moderated to 7% yoy while scooters supported with a 12% growth. Exports for TVS was stronger as the company entered new markets and expanded in existing ones. Bajaj Auto’s domestic 2W volumes grew 23% yoy, led by entry-level motorcycles, a strong marriage season and a low base (volumes in May 2017 fell 13% yoy). Hero MotoCorp’s volumes were also strong at 706k units (+11% yoy). The varying growth rates is partially due to the difference in the base - in May 2017, while Bajaj had shown a decline (down 10%), the other players HMCL (+9%), TVS Motors (+16%) and Eicher Motors (+25%) had reported reasonable growth.

CV – growth momentum continues: MHCVs registered strong growth led by replacement buying and shift to higher tonnage vehicles. The e-commerce sector and increased thrust on agriculture boosted LCV volumes. Ashok Leyland’s volumes grew 51% yoy, led by 70% yoy growth in M&HCVs, albeit on a low base (in May 2017 volumes fell by 22% yoy), supported by 10% growth in LCVs. TTML’s domestic truck volumes grew 86% yoy on strong demand from both M&HCVs and LCVs. VECV growth moderated to 29% yoy.

Tractor growth stable: M&M’s domestic tractor volumes registered steady 15% yoy growth, while Escorts reported 20% yoy volume growth. 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 M&HCV volume growth

Negative surprises: Slower than estimated growth for M&M’s UVs

Our view: Even though volume growth is on a low base, it seems to reflect an improvement in the underlying demand trends. With infrastructure spend increasing and rural discretionary consumption showing strong signs of revival, we expect strong demand in FY19. However, high crude prices and an increase in interest rates are potential risks. MSIL and Eicher Motors remain our top picks.