Report
Deepak Jain

Event update: Automobiles (October sales) - Festival retail volumes encouraging

While wholesale automobile volumes showed mixed signs in October with passenger vehicles (PV) stabilising and two-wheelers (2W) declining, retail volumes in 2W/PV showed high single-digit to low double-digit growth (festival to festival basis). The variance between retail and wholesale volumes reflects the correction in inventory levels, partly in preparation for transition to BSVI. We attribute the growth in retail volumes to high discounts, pent up demand (purchases postponed due to uncertainty around GST rates) and a low base. Even though retail volume growth has been encouraging, industry players in their commentaries seemed wary that the trends could sustain. We continue to prefer players with long-term sustainable advantages, such as Maruti Suzuki (MSIL) and Eicher Motors.

PV – stabilising amidst high discounts: Wholesale PV volumes in passenger cars and UVs stabilised during the month. However, retail volumes likely showed growth, led by high discounts and new product launches. MSIL reported 4.5% volume growth at ~153,435 units, with the domestic market reporting 4.5% growth. The compact segment grew by 16%, but the van and mini segments declined 27% and 13% yoy, respectively (S-Presso was launched in Oct). Tata Motors (TTMT) too saw PV volumes slide 28% yoy, which, as per the company, was in a bid to control inventory. M&M too posted 11% yoy decline in the automotive segment.

2W inventory corrects: Hero MotoCorp’s (HMCL) wholesale volumes fell ~18% yoy, while Bajaj Auto’s domestic motorcycle sales slipped 12% yoy. Royal Enfield (RE) ditched its weak trend, as volumes grew 2% yoy to ~72,000 units. 2W inventory declined to ~40 days (from 55-60 days in Sep) during the festival season. There was likely a sharp variance between wholesale and retail 2W volumes, as companies focussed on correcting high inventories ahead of a shift towards BSVI in April 2020.

CVs – Decline in M&HCV volumes continues; LCV moderates: CV volumes fell sharply, with TTMT reporting 63% yoy decline in truck volumes, Ashok Leyland (AL) seeing 48% decline and M&M showing 41% yoy slide. M&M’s VECV HD segment too reported 63% yoy decline. We believe weak operator profitability/overcapacity in the system will continue to impact the M&HCV segment. Notably, LCV/SCV volumes, which grew at a strong pace, too registered volume declines, indicating higher stress levels.

Tractors stabilise: While overall domestic tractor segment stabilised, M&M reported 4% yoy decline with Escorts reporting flat domestic tractor sales yoy. However, we expect the rural economy to improve soon on the back of better-than-expected monsoon.

Positive surprise: Maruti Suzuki/ RE volumes

Negative surprise: Lower-than-expected wholesale volumes in HMCL

Our view: The festival season has been stronger-than-expected, driven by (a) pent up demand, (b) record-high discounts and (c) relatively low base. A clearer picture of sustainable demand will likely be visible in the coming months, as companies pare discounts. BSVI transition will remain a concern, particularly for lower-end 2Ws. MSIL/Eicher Motors remain our preferred bets on long-term competitive advantages.

Provider
IDFC Securities
IDFC Securities

IDFC Securities Ltd., a subsidiary of the Infrastructure Development Finance Company (IDFC) wherein the Government of India holds a 20% interest, is India's leading equities broker catering to most of the prominent financial institutions,  both foreign and domestic investing in Indian equities. A research team of experienced and dedicated experts ensures the flow of critically investigated stock ideas and portfolio strategies for our clients. Our coverage spans across various growth sectors such as agriculture, automobiles, Consumer Goods, Technology, Healthcare, Infrastructure, Media, Power, Real Estate, Telecom, Capital Goods, Logistics, Cement  amongst other sectors. Our clients value us for our strong research-led investment ideas, superior client servicing track record and exceptional execution skills.

Analysts
Deepak Jain

Other Reports from IDFC Securities

ResearchPool Subscriptions

Get the most out of your insights

Get in touch