Ideas for Profit | Subdued sentiments, macro weigh on auto sales in December 2018

Nitin Agrawal
Moneycontrol Research 

Highlights:
- Disappointing set of numbers by auto majors
- Tight liquidity and non-availability of finance weigh on CVs
- Mandatory long-term insurance, higher interest rates impact PV and 2W sales
- Prefer Maruti, Ashok Leyland, Bajaj Auto and Eicher Motors
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Auto majors continue to witness de-growth in their monthly sales numbers due to subdued consumer demand caused by tight liquidity, non-availability of retail finance, higher interest rates and moderate economic activities ahead of elections.

The softness in Commercial vehicle (CV) segment which started last month continued. The soft patch is due to liquidity, financing challenges as well as the new axle load norms. Tractor segment was also weak on the back of lower-than-expected Rabi crop sowing.

Three-wheeler (3W) sales were mixed on the back of very high base for last years. Two-wheeler volumes were also mixed. Passenger vehicle (PV) sales continued to disappoint primarily because of the higher cost of ownership, a high base of last year and adverse macro factors.

Among auto players, we continue to like Maruti from PV segment, Ashok Leyland in CV, and Bajaj Auto and Eicher motors in the 2W segment.

Commercial Vehicle – continued signs of weakness
Tight liquidity, financing issues, and rising interest rates have dampened demand leading to lower volume for the CV segment in the month gone by. The new axle load norms and lower economic activities ahead of elections also impacted sentiment.

The outlook, however, continues to be positive, primarily, due to demand coming in from construction, focus on infrastructure, increase in mining activities and growth in Index of Industrial Production (IIP).

Notably, LCV (Light Commercial Vehicle) segment continues to perform well, driven by strong demand coming from the container and refrigerated trucks.

Company-wise, Tata Motors registered a decline of 14 percent year-on-year (YoY) in CV volume led by 18 percent decline in M&HCV segment and 10.3 percent in LCV segment. Ashok Leyland witnessed a decline of 20 percent, driven by 29.2 percent decline in M&HCV segment which got partially offset by 27.1 percent growth in LCVs. M&M posted a decline of 4 percent in the CV segment. Eicher Volvo, however, witnessed a growth of 2.7 percent.

Cars segment – adverse macro weigh
Rising interest rate and mandatory long-term insurance have increased the total cost of ownership for PVs leading to subdued consumer sentiments. Hence, all companies posted muted PV volumes for the month of December 2018.

The leader, Maruti, posted a decline of 3 percent in its volume for the month. Tata Motors’ passenger car segment grew 1.0 percent (YoY). The management of Tata Motors is expecting good months ahead on the back of the launch of its new SUV, Tata Harrier in January 2019. M&M posted a decline of 2.9 percent.

Two-wheeler (2W) segment: Bajaj and TVS continue to do well
In two-wheeler space, Bajaj Auto leads the pack with strong growth of 39.2 percent in the month, primarily, driven by the pricing actions taken by the company on its entry-level segment. The impact of this was seen on Hero, the leader in an entry-level segment that declined 4.2 percent in its monthly sales. Eicher also continues to post disappointing numbers and reported a decline of 13 percent.

TVS posted a YoY growth of 4 percent on the back of growth coming in from bikes (12.5 percent) and scooters (9.4 percent), which got partially offset by a decline of 12.6 percent in mopeds.

Three-wheeler (3W): mixed show
The overall 3W market posted mixed numbers in December 2018. TVS posted a strong growth of 36.7 percent and M&M grew 20.5 percent. Bajaj Auto, the leader in the space, posted a decline of 36.7 percent.

Tractors: a mixed bag
Tractor segment remains mixed with Escorts posting a YoY growth of 21.2 percent and M&M reporting a YoY decline of 5.9 percent.

Exports: continue to gain momentum
Export markets were mixed for companies. Maruti and Tata Motor posted a decline in their sales numbers whereas M&M, Bajaj Auto, TVS, Eicher and Escorts witnessed growth in the month of December 2018.

Companies we preferWe continue to like Maruti from PV segment, Ashok Leyland in CV, and Bajaj Auto and Eicher motors in the 2W segment. In light of subdued demand and outlook, stocks have corrected quite significantly (Maruti: 27 percent, Ashok Leyland: 41 percent, Bajaj Auto: 23 percent and Eicher Motors: 33 percent) from 52-week high making the valuation very reasonable for the leaders in their respective space. We advise investors to buy these companies in a staggered manner.

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