Weakness across segments; 2Ws an exception in Automobiles sector: IIFL Capital Services

3 Jan 2024 , 12:03 PM

Auto industry clocked weak sales in Dec 2023, with domestic 2W being only the exception. 2Ws grew ~20% YoY supported by strength in the recent festive season, and a low base (inventory destocking in Dec 2022). Analysts of IIFL Capital Services 2W industry growth estimate of 11% for FY24 is based on 5% YoY growth in H1 and 18% in H2; this is on track. PV grew only 5% YoY in Dec. High dealer inventory is forcing OEMs to destock post festive. MHCV industry grew 4% YoY. MHCV SAAR bounced back to 410k after a sharp downtick to 365k in Nov. LCV segment declined 12% YoY; the segment has stayed weak through 2023. Tractors were down ~20% YoY, due to weak demand in the festive period and high dealer inventory, following sub-optimal rains. Overall, analysts of IIFL Capital Services feel risk to volume estimates is to the downside. 

MHCV improves from Nov; LCV sees sharp drop: 

MHCV industry grew 4% YoY in Dec, an improvement from 1% YoY decline in Nov. MHCV SAAR improved to 410k. SAAR had collapsed from ~420k in Sep/Oct to ~365k in Nov, but regained some strength in Dec. Ashok saw sharp fall in mkt-share, to 29% in Dec vs. 31% FY24 YTD. Ashok has been losing mkt-share in terms of retail registrations; the loss is catching up at wholesale level. LCV industry volumes declined 12% YoY. On YTD basis, LCV is flattish, in-line with analysts of IIFL Capital Services FY24 estimate. 

PV growth weak at 5% YoY on inventory destocking: 

PV industry grew 5% YoY in Dec’23. Although festive retails were strong, they were supported by pre-existing order book. New order flow was weak and dealer stock was high, prompting OEMs to get into destocking mode. Maruti’s Dec’23 mkt-share dropped to 36% from ~42% in recent months. This is partly attributable to the 1-week production shutdown in Dec. Tata bounced back to 15%, from 12% in recent months. M&M’s SUV volumes came off to 35k vs avg. 42k in Sep-Nov. Analysts of IIFL Capital Services have maintained that M&M’s SUV retail registrations (as per Vahan) have not kept pace with wholesales; hence, wholesales should correct. Tractors down ~20% YoY in Dec: Tractors declined ~20% YoY in Dec’23. The deficient monsoon has led to moderation in end-demand. Analysts of IIFL Capital Services forecast 0% growth for Tractors in FY24, with some downside risk. 

Domestic 2Ws up ~20% YoY; 2W export recovery slower than expected: 

2W industry grew ~20% YoY, but dropped 24% MoM (seasonal). As per Vahan, retail registrations were up 13-14% YoY in Sep-Dec. This, combined with an easy YoY base (destocking in 2022), led to strong growth in Dec. Among 2W players, Royal Enfield (RE) and Hero underperformed with RE down 4% and Hero flat YoY. Unlike Hero, RE has been sub-par even in terms of retail registrations with Sep-Dec up only 4% YoY, vs 13-14% for the industry. Although 2W/3W exports have bottomed out, the improvement is gradual. Bajaj’s exports saw sequential drop while TVS saw MoM improvement.