Automobile Sector Monthly Update - October 2015 : Angel Broking

2Ws and PVs get festive boost; CV growth accelerates

2Ws and PVs report double-digit growth on festive boost; CV growth expedites

The passenger carrier segments viz two-wheelers (2Ws) and passenger vehicles (PVs) received a festive boost during the month with both the segments reporting a double-digit volume growth. October proved to be the best month for two wheelers this fiscal with the segment growing by 11% yoy for the month.

Passenger vehicle volumes too accelerated with the segment reporting a robust 26% yoy growth during the month. This fiscal, the festive season commenced in the month of October, whereas last year, the festive season was spread out in September and October. Thus, due to such distribution of festive season demand last year, the month of October this year had the advantage of a relatively low base of the corresponding month last year, in terms of volume growth. The commercial vehicle segment accelerated, reporting an 11% yoy growth during the month. Robust MHCV sales coupled with recovery in the LCV segment led to a double-digit growth in the overall CV segment.

Monthly 2W and PV volumes benefit from onset of festives

Two-wheelers and passenger vehicles posted robust growth during the month, benefitting from the onset of festive and low base of the corresponding month last year. In the two-wheeler segment, which grew 11% yoy during the month, Yamaha and Honda India outperformed growing by 25% yoy and 19% yoy, respectively. Hero MotoCorp and TVS Motors performed in line with the industry, while Bajaj Auto underperformed due to its absence in the scooters and on weak exports. In the passenger vehicles segment, which grew a robust 26% yoy, MNC players Honda and Ford outperformed on new product launches, growing by 52% yoy and 49% yoy respectively. Maruti Suzuki and Hyundai India performed in line with the industry, while Tata Motors and Mahindra & Mahindra (M&M) underperformed marginally.

CV sales grow in double-digits due to strong MHCV volumes and recovery in LCV

Commercial vehicles (CVs) accelerated in October 2015, registering a double-digit growth. The growth was led by MHCVs which grew 23% yoy, backed by recovery in the economy and improvement in fleet operator sentiments. MHCVs now contribute 43% of CV volumes as against 34% in the corresponding period of the previous year. Further recovery in the LCV segment (grew 4% yoy) also boosted the overall CV segment volumes. VECV, M&M and Ashok Leyland outpaced the industry, reporting 42% yoy, 31% yoy and 16% yoy growth, respectively. Market leader Tata Motors underperformed reporting a marginal decline of 4% yoy (in CV volumes), indicating market share loss.

Tractor segment remains weak with continued double-digit dip

Pressure on farm incomes led to continued weakness in the tractor space. Deficient rainfall and moderate increase in MSPs have dampened farm sector sentiments. The tractor segment dipped 16% yoy with YTD sales declining by 20% yoy.

Outlook

Better freight availability due to improving economic activity along with resumption of mining and increase in allocation towards roads has bolstered growth in the MHCV segment. The urban-centric PV industry is also picking-up with the rise in the income levels and the onset of the festives. Further, the recent rate cut by RBI before the festive season is likely to aid demand for commercial and passenger vehicles, going ahead. We expect MHCV and PV segments' growth to accelerate in FY2016. LCV segment has shown signs of revival recording a moderate growth during the month. We expect LCV recovery to gather pace in the coming quarters.

We expect revival for two wheelers in the near term given the onset of the festive season and give the low base of the corresponding period last year. However, tractors are likely to remain under pressure (we expect marginal decline in industry sales in FY2016) owing to deficient rainfall (monsoon this year has been 14% below normal) and only a moderate increase in MSPs.

Amongst our coverage universe, we prefer Eicher Motors due to huge demand potential and capacity expansion at Royal Enfield & strong growth in VECV owing to turnaround in the commercial vehicle industry. We prefer Ashok Leyland (as it is a pure MHCV play and would be a huge beneficiary of a turnaround in MHCV volumes). We also like TVS Motors given the market share gains on new product launches and jump in the margins on account of pricing power and operating leverage.

Source : Equity Bulls

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