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Event update: Automobiles (September sales) - Weak trends persist

Automobile volumes worsened in September 2019 across segments – Two wheelers (2W), passenger vehicles (PV) and commercial vehicles (CV) – despite heavy discounts and beginning of the festive season (Navratri). Even the early onset of festivals like Onam in South India and Ganesh Chaturthi in the West and North failed to boost demand.  We believe this reflects weak macroeconomic-induced sentiment (slowing GDP growth rates), regulatory issues (higher insurance costs/ABS/ Axle load norms) and liquidity crisis. We expect the weakness to continue, at least in the near term. Measures taken by the government to ease liquidity could take time to take effect, in our view.

PV – Weakness continues: PV volumes in passenger cars and UVs continued to slide in September. Maruti Suzuki (MSIL) reported ~24% volume decline at ~122,640 units, with the domestic market reporting 25% fall. The compact segment declined 23% with 32% fall in vans, whereas the Mini segment declined 43% yoy but grew 98% mom on the back of new launch, S-Presso. Tata Motors (TTMT) too saw PV volumes slide 56% yoy, which as per the company, was in a bid to control inventory. M&M posted 21% yoy decline in the automotive segment, despite the launch of Marazzo and XUV3OO.

2W volumes remain stressed with continuing high inventory: Hero MotoCorp’s (HMCL) volumes fell ~20% yoy, while Bajaj Auto’s domestic motorcycle sales slipped 35% yoy. Royal Enfield (RE) continued its weak trend, with volumes sliding more than 17% yoy to ~59,500 units. With 2W inventory continuing at elevated levels (55-60 days as per our channel checks). Given the BSVI deadline of April 2020, we see a distinct possibility of higher discounting being used to clear BSIV inventory in Q4, if sales fail to pick up during the festive season.

CVs – Decline in M&HCV volumes continues; LCV also faces pressures: CV volumes fell sharply, with TTMT reporting 69% yoy decline in truck volumes, M&M showing 62% yoy slide and 63% yoy drop in the VECV HD segment. 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 remain weak: The beginning of the festive season brought some respite to the domestic tractor segment, with M&M and Escorts reporting flat domestic tractor sales yoy, post decline since two quarters. However, we believe growth will take time to stablise, given the slowdown in the rural economy.

Positive surprise: Flat tractor sales; Slightly better than expected RE volumes

Negative surprise: Sharper than expected decline in CVs/2 wheelers

Our view: Weak sentiment, regulatory changes (higher insurance/axle load norms) and liquidity constraints have kept volumes under pressure. While government’s recent corporate tax cut announcement will bear fruit over the medium to long term, weakness is expected to continue near term. Given the upcoming BSVI demand, the festival season is critical, particularly for 2W companies with high inventory. MSIL/Eicher Motors remain our preferred bets on expected long-term competitive advantages.