Automobile Sector Monthly Update - LCV recovery accelerates; PVs under pressure - January 2016 - Angel Broking

LCV recovery gains momentum; PV sales flat

The LCV recovery gathered pace with January 2016 being the second consecutive month of the segment reporting growth. The segment posted a growth of 11% yoy for the month. Robust growth in the MHCV segment over the last four to five quarters has now percolated down to the LCV segment given the hub and spoke model of transportation. The PV segment reversed its double-digit growth trend, reporting flat volumes for the month. Lower production days coupled with the ban on large diesel vehicles in the NCR impacted PV sales.

Pick-up in LCVs coupled with continued double-digit HCV growth lifts overall CV segment

Decent growth in LCVs (form 60% of CV volumes) coupled with continued robust double-digit growth in the MHCV segment lifted the overall CV industry, which reported a 20% yoy growth in January 2016. Improved economic growth, better fleet operator profitability due to firm freight rates and reduction in diesel prices and pick up in infrastructure activity have led to continued robust growth for MHCVs. Further, strong MHCV growth in the last twelve to eighteen months has paved the way for growth in the LCV segment with a lag effect, thus boosting overall CV sales numbers. Ashok Leyland outperformed, reporting a growth of 30% yoy. Tata Motors and VECV grew in line with industry while Mahindra & Mahindra (M&M) underperformed.

PV sales subdued

The PV segment underwent a reversal in its double-digit growth trend, reporting flat volumes during the month. Ban on large diesel vehicles in NCR coupled with lower production impacted volumes. Hyundai and M&M outpaced the industry, growing by 9% and 13% yoy respectively, led by new launches. Market leader Maruti Suzuki India (MSIL) trailed the industry, reporting flat volumes. Honda and Tata Motors reported a sales decline with them losing market share.

Two-wheelers remain lackluster

Two-wheeler (2W) sales continue to be subdued with the segment reporting 5% yoy growth during the month. Weak rural sentiments (rural sales form 40% of the overall industry volumes) continue to impact 2W demand. TVS Motors outperformed, growing by about 12% yoy, drawing momentum from new product launches. Hero MotoCorp and Bajaj Auto underperformed, reporting flattish volumes.

Outlook

The prospects of the automotive industry look better for FY2017 as we expect the growth momentum to accelerate across segments. We expect growth in the CV segment to gain further traction in FY2017 on back of better freight availability due to improving economic activity, resumption of mining and increase in infrastructure investments. Double-digit growth in MHCVs in the last 5 to 6 quarters is now percolating to the LCV segment. Further rising income levels, an expectation of further easing in interest rates and increase in government employees' wages (Seventh Pay Commission recommended 23% salary hikes and proposals are expected to be implemented from January 2016) are likely to boost sales in the passenger segment (PVs and 2Ws) in FY2017. PV industry growth is likely to gain momentum in FY2017. Also, the 2W industry is expected to return in the growth trajectory in FY2017 on account of low base of the previous corresponding periods and gradual improvement in rural sentiments.

Amongst our coverage universe, we prefer Ashok Leyland as it is a pure MHCV play and would be a huge beneficiary of the robust growth in the MHCV industry. We also like TVS Motor given its market share gains on the back of new product launches and jump in margins on account of pricing power and operating leverage. We also prefer M&M due to new launches in the utility vehicle segment which would lead to regaining market share and expected recovery in the tractor demand in FY2017.

Source : Equity Bulls

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