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Event update: Automobiles - Oct 2018 – 2Ws on a strong footing; Lacklustre sales for PVs

Automobile volumes showed mixed trends at the onset of the festive season, with 2W sales volumes on a strong footing, while PV volumes were lacklustre. Commercial vehicles volumes which were growing at a steady run rate, moderated. For the sector, rising fuel/interest rates may have made an impact on volumes. This seems to reflect in the tepid passenger vehicle volumes. For 2Ws, the growth despite regulatory issues (insurance) and a weak start to the festivities seems to suggest a buildup in inventories. Momentum in the M&HCV segment showed a marked moderation reflecting liquidity concerns along with weakening operator profitability.

PV –Lacklustre volumes ahead of the festive season. Overall, PV volumes remained weak in October for both passenger cars as well as UVs. MSIL reported overall flat volumes at 146,766 units, as exports fell 17% to 8.6k units, while domestic volumes grew 1.5% to 138,100 units. This is the 4^th consecutive month of weak sales for MSIL. UV volumes too decline on a higher base of last year (+ 30%). M&M’s UV volumes grew marginally by 1% yoy, despite despatches of the new Marazzo. Tata Motors’ (TTMT) passenger volumes rose 11% yoy (significantly lower than YTD growth rates).

2Ws - Strong volume growth ahead of restocking for festive season; Royal Enfield (RE) volumes subdued on production loss due to workers’ strike: Hero MotoCorp (HMCL) reported strong 16% yoy volume growth on stocking for the festive season, while TVS’ domestic 2W volumes continued its strong momentum with a 25% yoy, led by scooters and supported by motorcycles. Bajaj Auto’s domestic volumes (+33% yoy) continued to benefit from the price cuts. The growth in the 2W space despite regulatory issues (higher insurance costs) and a weak start to the festival season seems to reflect (a) a low base and (b) inventory stocking with dealers. Incase the weak trends on retail volumes continue, the high inventory levels could impact despatches going forward.  RE volumes were subdued at ~70,451 units, mere 1.4% yoy growth, was partially on account of production loss of ~15000 units in Oct due to workers’ strike at its Oragadam plant since 24 September2018 – media reports suggest that the strike continues. The company has lost cumulative production volumes of 25,000 units since the strike.

CV – Growth momentum moderates: Growth momentum in MHCVs moderated as compared to last 3-4 months - Ashok Leyland reported an M&HCV volume growth of 7% (YTD 30%); TTMT’s M&HCV trucks grew by 16% (total M&HCV volumes likely grew in single digits as bus sales were negative), while VECVs HD segment (including buses) were flat.The LCV segment reported strong growth, we believe the M&HCV segment will continue to be impacted by the NBFC liquidity crunch and weakening operator profitability.

Tractor growth recovers: M&M’s domestic tractor sales grew by 18% yoy, while Escorts’ volumes jumped by 26% yoy. The growth comes after a sharp decline in September and reflects the change in the timing of the festival season.

Positive surprises: 2W volume growth

Negative surprises: Weak UV volumes of M&M and MSIL

Our view: The industry seems to be facing multiple headwinds – higher interest rates/fuel price along with regulatory pressures (increased insurance costs) – that could impact near term demand. We note that while the festival season beginning on a moderate note, the industry seems to be hoping that the volumes will improve over the next couple of days. In case volumes fail to pick up meaningfully, over the next few months, there is a possibility of inventory de-stocking particularly in the 2W segment. With a tightening in liquidity and freight owners profitability under pressure, we would also be cautious on the commercial vehicle cycle. Continue to prefer Maruti Suzuki/ Eicher Motors having long term competitive advantages.