Is a revival in auto sales in the offing? Smart recovery seen by these analysts

On Tuesday, major auto stocks witnessed selling pressure from investors after most of them announced their May 2019 sales which was a mixed bag. The S&P BSE Auto index finished at 18,743.88 down by 58.90 points or 0.31%. Gainers on this index were stocks like MRF, Ashok Leyland, Motherson Sumi, Balkrishna Industries, Apollo Tyres, Cummins India, Eicher Motors and Maruti Suzuki. On other hand, losers list included stocks like Hero Motocorp, Bajaj Auto, TVS Motors, Tata Motors, Bharat Forge and M&M. Overall, the auto sector continues to register muted sales in volume terms and the same happened even in May, 2019. This, as per analysts at ICICI Securities, was due to subdued retail demand sentiments and elevated inventory levels in the system. 

Explaining sales of passenger vehicles, Shashank Kanodia and Jaimin Desai, Research Analysts at ICICI Securities said, “segment seems to be the hardest hit with MSIL the segment industry leader reporting 25% decline in domestic dispatches. M&HCV segment also witnessed tepid numbers as customers waited on the sidelines before the new economic policies kick in at the Centre.”

Meanwhile, Priya Ranjan, Vikrant Gupta and Apoorva Patil analysts at Antique Stock Broking said, “PV segment blues continued with combined volume of top six players down 20.1% YoY in May as OEMs continued to correct channel inventory. Inventory levels stood as per FADA stood at 40-45 days for PVs at the start of May, well above the average levels of 4 weeks. MSIL domestic sales were down 23% YoY at ~125.5k units, while Hyundai recorded a decline of 5.6% YoY to 42.5k units. M&M's PV sales were down 0.5% at 20.6k units, whereas TTMT registered a 38% YoY decline at 10.9k units. Among the other major PV players, Toyota recorded a decline of 7.4% YoY at 12.1k units while Honda posted a decline of 28% YoY at 11.4k units.”

In regards to commercial vehicle segment, these analysts mentioned that,  de-growth was reported by all industry players with Ashok Leyland the clear outlier reporting least volume decline of 3.6% YoY vs. its competitors. TML reported volume decline of ~20% while VECV segment at Eicher Motors also reported volume decline of 20%. In tractors, market leader Mahindra & Mahindra registered a total volume decline of 16% YoY (24,704) units while volumes at Escorts fell 18% YoY (6,827 units). In the 3-W segment, volumes (domestic + exports) declined at the industry leader i.e. Bajaj Auto to 54,167 units (down 16% YoY).

In case of two-wheelers, the duo at ICICI highlighted that, Eicher continues to struggle and reported volume decline of 17% YoY (62,317 units). However, a recovery was seen at Hero MotoCorp which reported volumes of 6.5 lakh units, up 13.5% MoM (down 7.6% YoY). Bajaj, on the other hand, continued to outperform others with domestic 2-W segment growth of 7% YoY (2.1 lakh units).

As for four-wheelers,  the steepest decline was witnessed at Tata Motors that reported volume decline of ~38% YoY. Industry leader MSIL reported total volume decline of 22% YoY. The clear outperformer was, however, M&M with UV dispatches up 1.2% YoY aided by impressive launches in the recent past (Marazzo, Alturas and XUV 300), explained ICICI analysts. 

Also tractors sales was lackluster, with M&M volumes seeing a decline of 16.5% YoY to 23.5k units while Escorts declined by 18% YoY to 6.8k units.

When will auto sector revive?

The analysts at ICICI said, “With a strong political mandate, high base neutralising post June 2019, we expect domestic auto space to witness a smart recovery from Q2FY19 onwards.”

Vivek Kumar, Vaikam Kumar S  and Jayesh Chandra Gupta  analysts at JM Financial said, “While the overall auto volume numbers were largely on expected lines, a timeline for recovery remains uncertain. It is important to keep a close track of dealer inventory for identifying leading signs of demand revival. Among other factors, a low base will help support growth from 2Q onwards.”