Equity | May 05
Most of the trends seen in April are very much similar to the trends seen in previous few months. The PV sales bounced back from March and continued again to be robust . MHCV industry has been outperforming since the start of FY 15 and continued its trend in April as well. While scooters segment remained strong in the 2W segment, we are seeing an evident slowdown in motorcycle segment given weakness in the rural economy. On the PV side, the likes of Maruti Suzuki seems to be getting all things right with whopping sales growth entering FY 16, while Tata Motors triumphed on new launches Zest and Bolt. On the two wheeler side, Hero saw a slowdown with growth rate declining steeply for the first time. TVS which had been one of the outperformers of the year so far, continued to grow but at a lower rate than before. 2W segment has been affected due to weakness in the rural economy on the back of weak agricultural output and unseasonal rains. Bajaj Auto saw a growth in April, a positive one after a long gap, albeit a very slim one. This was due to strong 3W sales and exports, while motorcycle sales declined with the industry trend. On the MHCV side Ashok Leyland has been a resilient performer with MHCV sales putting up a very strong show thus indicating revival in MHCV industry. Even Tata Motors posted strong MHCV sales performance in April growing at ~20%. With new launches coming from most of the auto companies in FY 16 and with new government expected to come up with reforms and an expected interest rate cut may trigger a strong movement in auto sales in FY 16. We like Tata Motors on the JLR story and ongoing turnaround in the MHCV industry, Maruti on the boom in the PV segment and new vehicle launches and Hero on its market leadership and expected revival in rural markets in H2 FY16. We also like Ashok Leyland on robust MHCV story. The current government’s emphasis on the ‘Make In India’ theme will yield rich dividends to the CV players in terms of profitability as the GOI has increased the customs duty to 40% from 10% on CVs which would curb imports and foster local procurement of raw materials. We are concerned about the prospects for Bajaj Auto given the weak performance in domestic motorcycle business and recent development in Nigeria, one of the biggest export markets for Bajaj. We are also concerned about M&M on underperformance in both of its segments.
Ashok Leyland – (BUY, TP – Rs 80) – Strong yoy sales
• MHCV sales grew by 44.8% yoy but declined by 34.7% mom to 6,549 units on a cyclically strong March and weak April. Comparison done on yoy basis makes sense in such situations as most of the auto industry performance is cyclical. On a yoy basis, we are seeing a strong turnaround in the MHCV industry. Also the GOI is planning to focus on new projects along with increased concentration on stuck up projects, which may see a continued strong growth in MHCV sales in FY 16 .
• LCV sales too grew by 37.3% yoy to 1,886 units as things start to look up in the LCV segment too.
• We expect FY 16 to be very strong on the back of revival in infrastructure activities and overall demand scenario. LCV segment will follow suit but with a lag. LCVs are already showing reduction in drop in sales growth.
Bajaj Auto – (NEUTRAL, TP – Rs 2,200) – Motorcycle de-growth offset by 3W growth
• Bajaj Auto’s total sales in April by 1.4% yoy and 34.2% mom to 3.36 lakh units. Motorcycle sales in the month fell by 5% yoy at 2.85 lakh units on domestic underperformance and weakness in rural markets. Bajaj’s two wheeler segment has been a laggard since last couple of years and continued to do so even in April. It has always been a victim of cannibalization of its own brands Pulsar and Discover.
• 3W was the savior again in April as sales increased by 58% yoy to 50,483 units.
• Exports sales continued to remain muted as the sales have gone up by just 7% yoy at 1.61 lakh units as markets like Nigeria had already started shown some signs of weakness due to currency devaluation and interest rates hike in December. However, this was still an improvement sequentially.
Hero Motocorp – (OUTPERFORMER, TP – Rs 2,701) – Rural weakness creeps in..
• Hero’s sales declined by 6.6% yoy and remained flat mom at 533,305 units below our expectations. This was however in line with the weakness seen in the 2W industry on the back of unseasonal rains in February, March and April.
• Going forward, we think there will be some pressure on Hero’s sales as well in the rural markets as 50% of its sales come from there. But, strong market leadership position, well spread network and popularity of famous low ticket size models may act as a cushion in difficult times. Also we think that if monsoon is better this year then we may see a healthy revival in the second half of the year.
Mahindra and Mahindra – (NEUTRAL, TP – 1,274) – Muted performance goes on and on…
• M&M sold 36,727 units in the auto segment, a growth of 1.2% yoy. Passenger UV+ Verito sales in the month grew by 1% yoy to 18,314 units. This flattishness was due to the structural issue related with the absence of M&M in the compact SUV segment. In the Q1 segment, M&M has lost market share of >600-700 bps in FY 15 to the likes of Duster, Ecosport, Ertiga and Mobilio. The company is planning to launch two SUVs in FY16 to cater to this segment. These launches according to us will face stiff competition from the existing competitive products and the new launches (one from Maruti). However, the growth seen in April of 1% was still an improvement against the heavy falls seen in FY 15. We believe this was on low base of last year and need to wait and watch whether there is any meaningful recovery in the ensuing months.
• 4W pick-up segment which includes Gio, Genio and Maxximo along with other pickups like Bolero Max, also grew by just 1% to 11,744 units.
• 3Ws grew by 4% yoy to 3,674 units during the month which was again a volatile show.
• Exports grew by 4% yoy while in April. March saw a better growth on the back of traction observed in Africa and S America, while its contracted again in April.
• FES segment posted a drop of 13% yoy to 18,011 units due to delayed rains and sowing, delayed paddy crop, low yield and low prices of sugarcane, cotton and paddy, weak rabi crop and unseasonal rains in the last couple of months in vital states like Rajasthan, Maharashtra, UP and MP. After posting a stupendous growth of 21-22% in FY 14, the tractor industry has witnessed a lull in FY 15. April however witnessed a robust growth sequentially at 47% which was a positive surprise to us considering the overall scenario and seasonally weak April. Performance in FY 16 depends upon factors such as rainfall, MSP growth, infrastructure development in rural areas and overall uptick in the rural economy.
Maruti Suzuki – (BUY, TP – Rs 4,130) – Fantastic numbers!!
• After weak March, the company came back on track in April as total sales grew by 29.6% yoy to 111,748 units
• The small car petrol segment comprising Alto and Wagon R grew by 35.9% to 35,403 units, thus snapping the declining trend seen in last month. This was due to petrol prices still remaining stable and the gap between diesel and petrol nasrrowing.
• Compact vehicle segment sold 42,297 units, a growth of 8.7% yoy. Despite the narrowing of gap between petrol and diesel prices, the sales grew by 8.7%.
• The new launch of Ciaz sold 4,662 units, which was a stable performance.
• Domestic sales grew by 27.3% yoy, while exports grew by 56%, on the back of low base of last year.
• Ertiga’s UV segment in the month fell by 11.2% yoy to 4,452 units, while the vans segment has been showing good growth, which in April was 45% to 12,069 units thus continuing its good run in FY 16.
TVS Motor – (NEUTRAL, TP- Rs 217) – Defying the trend in 2W industry
• TVS sold 195,937 units in April which was a growth of 14% yoy and a decline of 7.2% mom.
• Motorcycles sales grew by 13% yoy at 74,953 units, while scooters sales grew by 15% yoy at 49,375 units on the back of strong sales of Jupiter and existing Scooty Zest and Wego models.
• 3 Wheelers sales growth to a strong 48% yoy to 9,896 units.
• Exports sales grew by 18% to 32,426 units.
• In FY 16, we expect the slowdown in 2W sales to impact TVS as well. The new 100 cc motorcycle launch will face tough competition from the market leader Hero in that segment. There will be a tapering down of 2W sales on the back of high base of FY 15, thus bringing down the overall volume growth rate. Absence of opening of any significant permits on the 3W side may impact TVS’ 3W sales. Exports and scooters remain the strengths of TVS in FY 16 as well.
Tata Motors – (BUY, TP – Rs 663) – Strong growth in cars and MHCV lift up the show
• Tata Motors sold 36,205 vehicles in April, a yoy growth of 6.6% on strong MHCV and car sales
• Commercial vehicles sales for the month declined by 5% yoy which is still a small number considering the high base of last year. LCV sales declined by just 19% yoy while MHCV sales reported a strong growth of 21% which is a great sign pointing towards strong revival. Recovery in MHCV sales can be derived from some pick up in industrial and infrastructure activities in the country.
• Passenger vehicle sales impressed and surprised one and all by growing 37% yoy. Car sales grew by 58% yoy and UV sales dropped by 27% yoy. The success of Zest and Bolt has resulted into such strong car sales, while UV sales have underperformed due to competition in the compact SUV segment.