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Event update: Automobiles; Nov 2018 – Weak festive season; CVs see sharp decline

Automobile volumes witnessed a slowdown in all the segments, post the weak festive season. Notably, even heavy commercial vehicles (CV), which were growing at a steady pace, reported a sharp decline. A convergence of factors (higher fuel prices/interest rates, insurance hikes, liquidity crisis) impacted sentiment and volumes in the sector. Dealers saw some inventory correction owing to muted sales during the festival season. Demand in passenger vehicles (PV) too was weak (Maruti Suzuki, M&M and Tata Motors registered flat volumes), but, 2Ws fared better due to price cuts/new vehicle launches. The M&HCV segment too saw a sharp decline (~20% yoy) due to weak profitability of fleet owners and tightening of liquidity norms by NBFCs converging with M&HCV truck demand.

PV – Weak festive season led to slowdown in PVs: Overall, PV volumes remained weak in Nov for both passenger cars as well as UVs. Slowdown reflects the weak demand in the festive season, which resulted in limited inventory push. Maruti Suzuki (MSIL) reported overall flat volumes at 153,539 units, as exports fell 19% yoy, while domestic volumes were flat at 146,018 units. This is the 5^th consecutive month of weak sales for MSIL. UV volumes too moderated to 2% yoy. M&M’s UV volumes grew by marginal 1% yoy, despite despatches of the new Marazzo. Tata Motors’ (TTMT) PV volumes declined 1% yoy (significantly lower than YTD growth rates).

2Ws – Volumes moderate; Royal Enfield (RE) volumes decline on production loss due to workers’ strike: Hero MotoCorp (HMCL) reported flat volumes yoy due to a weak festive season, a result of muted consumer sentiment and high insurance costs. HMSI volumes fell 9% yoy in Nov. However, TVS’ domestic 2W volumes continued their strong momentum and were up 26% yoy, led by scooters and supported by motorcycles. Bajaj Auto’s domestic volumes (+45% yoy) continued to benefit from price cuts. RE volumes fell 6% yoy at ~65,744 units, partially on account of production loss due to workers’ strike at its Oragadam plant since 24 Sep 2018 (plant became fully operational on 13 Nov). With only 24 working days during the month, Nov 2018 volumes too were impacted.

CV – Sharp decline in M&HCV volumes; LCV moderates: M&HCV volumes declined across companies, contrary to the momentum seen over last 4-5 months – Ashok Leyland reported 18% yoy decline in M&HCV volumes; TTMT’s M&HCV trucks fell 24% yoy, while VECVs HD segment (including buses) slid 4% yoy. While the LCV segment reported moderate growth, we believe liquidity crunch in NBFCs and weakening operator profitability will continue to impact the M&HCV segment.

Tractor growth recovers: M&M’s domestic tractor sales grew 13% yoy, while Escorts’ volumes jumped 56% yoy. Growth came on account of a low base and change in timing of the festival season.

Positive surprises: Volume growth in TVS

Negative surprises: Sharper-than-expected decline in MHCV sales

Our view: Although the industry is not yet out of the woods, we expect some respite from industry headwinds (higher interest rates/fuel price regulatory pressures) and correction in crude prices. However, CV volumes could remain negative on tightening liquidity and given that freight owners’ profitability is under pressure. We continue to prefer MSIL /Eicher Motors on expected long-term competitive advantages.