Most of the trends seen in May are very much similar to the trends seen in previous few months. The car sales continued again to be robust . MHCV industry has been outperforming since the start of FY 15 and continued its trend in May 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 in the first two months of FY 16, while Tata Motors triumphed on new launches Nano Gen X, Zest and Bolt. On the two wheeler side, Hero saw a slowdown with growth rate declining second time in a row. 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 which had seen  a growth in April again posted a de-growth albeit a slight one. This was because strong 3W sales offset the weakness in motorcycles. Export performance too was muted. 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. May witnessed a resilient performance o the LCV side of Leyland too. We need to see its consistency. Even Tata Motors posted strong MHCV sales performance in April growing at 17%.   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. Monsoon remains the key monitorable and H1 may remain muted, while second half may witness strength on low base. 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 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. For M&M, though the company is coming up with 9 new launches in the compact SUV segment, we remained worried about the competition and aggressive pricing which may hurt the profitability of the company. Also tractor business revival remains key to the further growth of the company.  We are concerned about the prospects for the entire 2W industry and M&M on structural issues like rural weakness and monsoon uncertainty.

Ashok Leyland – (BUY, TP – Rs 78) – Strength continues

·         MHCV sales grew by 41.1% yoy and 5.2%% mom to 6,892 units. 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 2,402 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 2,566) – Motorcycle de-growth offset by 3W growth

·         Bajaj Auto’s total sales in May by declined by 2% yoy and grew by 2.7% mom to 3.45 lakh units. Motorcycle sales in the month fell by 4% yoy at 3.01 lakh units on domestic muteness 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. However, the recent launches of Platina CT 100 and a Pulsar refresh has led to a sequential rise in motorcycle as well as overall sales. We hope this trend to continue.

·         3W was the savior again in May as sales increased by 13% yoy to 43,576 units, but it was a 15% fall mom on the back of absence of new permits opening.

·         Exports sales continued to remain muted as the sales have gone up by just 2% yoy at 1.58 lakh units as markets like Nigeria though have started recovering are still not yet fully recovered. But Egypt, and other African countries have order backlog which shows the potential for sales to grow.

Hero MotoCorp – (NEUTRAL, TP – Rs2,693) – Subdued performance in line with the weak rural economy

·         Hero’s sales declined by 5.4% yoy while increasing mom at 569,876 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. In short to medium term the stock will see some pressure.

Mahindra and Mahindra – (NEUTRAL, TP – 1,310) – Tractors sink, autos improve

·         M&M sold 36,706 units in the auto segment, a de-growth of 3% and remained flattish sequentially.  Passenger UV+ Verito sales in the month de-grew by 7% yoy to 18,135 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 9 new products in FY16 to cater to this segment. We believe this slight de-growth is still an improvement on the heavy declines seen earlier 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, fell by 7% to 11,407 units, which was a 2% decline mom.

·         3Ws grew by 3% yoy to 3,827 units during the month which was again a volatile show.

·         Exports grew by 41% yoy in May. This was due to some traction gained in Africa.

·         FES segment posted a drop of 19.6% yoy  to 19,257 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 sequential growth at 6.9% which was a positive surprise to us considering the overall scenario.  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) – Sizzling  numbers in May!!

·         May witnessed solid numbers on account of sustained demand for passenger vehicles as the total sales grew by 13.8% yoy and 2.8% mom.

·         The small car petrol segment comprising Alto and Wagon R grew by 20.6% to 35,062 units. This was due to petrol prices still remaining stable and the gap between diesel and petrol narrowing.

·         Compact vehicle segment sold 41,926 units, a de-growth of 5.7% yoy. This came on the back of diesel : petrol cost benefit dynamics turning unfavorable. 

·         The new launch of Ciaz sold 5,012 units, which was a stable performance and an incremental movement northwards.

·         Domestic sales grew by 13% yoy, while exports grew by 20.3%, on the back of increased traction coming from African markets.

·         Ertiga’s UV segment in the month grew by 6% yoy to 5,567 units, while the vans segment has been showing growth of 7.7% to 11,602 units continuing its good run in FY 16.

TVS Motor – (NEUTRAL, TP- Rs 217) – Growth slows down a bit

·         TVS sold 220,079 units in May which was a growth of 6.4% yoy and 12.3% mom.    

·         Motorcycles sales grew by 8% yoy at 84,660 units, while scooters sales grew by 7% yoy at 54,426 units on the back of strong sales of Jupiter and existing Scooty Zest and Wego models.

·         3 Wheelers sales was stunted in May as the company sold 9,236 units, a decline of 1.4% yoy and 7% mom. This was the first time since the three wheeler business was launches that the company has posted a de-growth. This is in line with the absence of new permits getting opened up and 3W industry’s tapering growth 

·         Exports sales grew by 22% to 43,595 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 578) – Strong growth in cars and MHCV lift up the show

·         Tata Motors sold 39,496 vehicles in May, a yoy growth of 5% on strong MHCV and car sales

·         Commercial vehicles sales for the month declined by 6% 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 17% 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.