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Event update: Automobiles - Sept 2018 – a mixed bag; eyes on the festival season

Automobile volumes showed mixed trends on a high base , rising fuel prices and regulatory issues. While growth in passenger vehicles (PV) was extremely weak, commercial vehicles (CV) continued with their robust growth. Pressure from Maruti’s (MSIL) entry level passenger cars and a fall in Mahindra & Mahindra’s (M&M) utility vehicles (UV) volumes (despite the new Marazzo) caused weakness in the PV segment. 2-wheeler (2W) volumes were steady, with likely mid-single-digit domestic growth on inventory build-up and discounts before the festive season. Momentum in CVs continued, with sustained uptrend in medium and heavy commercial vehicles (M&HCV) and light commercial vehicles (LCV). However, we expect headwinds from interest rates, axle norms and fuel prices to impact the volume momentum in CVs.

PV – While MSIL’s volumes were weak on pressure from the entry-level segment, M&M’s UVs saw a sharp decline. Overall, PV volumes remained weak in Sep for both passenger cars as well as UVs. MSIL reported overall flat volumes yoy at 162,290 units, as exports fell 25% to 8.7k units, while domestic volumes grew 1.5% to 1,53,550 units. This is the 3^rd consecutive month of weak sales for MSIL. The entry level segment declined 9% yoy to 35,000 units. We note only Brezza had a meaningful waiting period within MSIL’s car portfolio. M&M’s UV volumes fell by sharp 18% yoy, despite despatches of the new Marazzo. Tata Motors’ (TTMT) passenger volumes rose 7% yoy (significantly lower than YTD growth rates).

2Ws - Steady volume growth; Royal Enfield (RE) volumes subdued on production loss due to workers’ strike: 2W volumes were steady. Subdued RE volumes at ~71,662 units, mere 2% yoy growth, was partially on account of production loss of ~10,000 units in Sep due to workers’ strike at its Oragadam plant since 24 September2018 – media reports suggest that the strike continues. Hero MotoCorp (HMCL) reported steady 7% yoy volume growth, while TVS’ domestic 2W volumes grew at a robust 18% yoy, led by all segments. Bajaj Auto’s (BJAUT) domestic volumes grew 11% on (a) price cuts. The coming months could see an impact on account of increased insurance cost.

CV – Continuing growth momentum unlikely to sustain: Growth momentum in MHCVs continued, in spite of change in axle load norms. Ashok Leyland reported 26% yoy growth in volumes, led by 20% yoy growth in M&HCVs and 44% growth in LCVs. TTML’s domestic truck volumes rose 26% yoy  (M&HCV volumes up 30% yoy), despite the uncertainty on the applicability of change in axle load norms. LCVs continued to zoom with 21% volume growth. A decline in the bus segment caused VECV volume growth to moderate to 10% yoy. As highlighted in our recent notes, growth sustainability in H2 seems questionable, given the pressure on operator profitability.

Tractor growth weakens: M&M’s domestic tractor sales fell 18% yoy, while Escorts’ volumes too moderated at 2.5% yoy growth. Going forward, we expect to see the negative impact of weak monsoons on tractor volumes, which in any case saw the impact of change in the timing of the festival season.

Positive surprises: Volume growth in TVS Motors

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

Our view: Our channel checks suggest that the start of the festival season has not been particularly strong (Onam in Kerala was affected by floods; Ganesh Chaturthi in Maharashtra has been tepid). In addition, macro factors - higher fuel prices, increased interest rates and a weak monsoon coupled with regulatory issues (increased insurance costs) could impact volume growth. In the above context, the festival season could be a harbinger of volume growth in future.