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Motown showing signs of initial stabilisation: Chirag Jain, SBICAP Sec

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Last Updated: Jul 01, 2019, 03.09 PM IST|Original: Jul 01, 2019, 03.09 PM IST
Chirag Jain, SBICAPS-1200


  • Maruti would be preferred in the auto pack.
  • We will continue to remain cautious on two-wheeler space.
  • The CV and tractor space will continue to be weak.

We will continue to remain cautious on the two-wheeler space, even though there is near-term recovery and signs of stabilisation in demand, says Chirag Jain, Lead Automobile Analyst, SBICAP Securities.

The market expectation is that motown will remain in low gear. What you are expecting in terms of a degrowth compared to what we witnessed last month?
First, even this month we will more or less see weakness, or rather degrowth across segments and companies. But the key thing to note is that we are seeing some signs of initial stabilisation as far as retail demand is concerned; especially in the passenger-vehicle space. Even in the two-wheeler space, we have seen some recovery in the northern melt in the first quarter. Even though nationally things are weak because of southern and western markets, there are some signs of things stabilising.

We would like to see retail sales, most importantly, in terms of decline narrowing. Year-on-year growth in April and May was almost 18% to 20% down for passenger vehicles. This month, the degrowth could be in the range of 10% to 12% for Maruti and the industry. We are seeing some signs of stabilisation and that would be reflected in wholesale numbers declining at a lower rate compared to what we have seen in the month of April and May.

Bajaj Auto sold 4.04 lakh units in June. How does it stack up with your expectations in terms of month-on-month and year-on-year?
It has been in line with our expectations -- flattish on year-on-year basis in overall numbers. The key thing about Bajaj Auto is that last year they were growing significantly ahead of the market, largely because of the price cuts that they had done across their product portfolio. Now, most of the volumes are in the base for domestic motorcycles. That is a reason the last couple of months we have seen almost flattish growth for Bajaj Auto; especially in the domestic-motorcycle space. Even in the export front, they have started to see certain challenges. That is a reason that on an overall basis their growth has been flat compared to the high growth that they were witnessing last year.

Is the flat June data from two-wheelers and four-wheelers an indication that the market has bottomed out?
As far as June data is concerned, obviously Bajaj was an aberration. They were growing phenomenally well last year and now the base is catching up, and therefore the growth is narrowing. For other companies there will be a decline, but it was narrow in the month of June compared to what we saw in April and May. This could be seen as signs of demand stabilising and recovering over the next three-to-six months -- especially around festive season -- driven by the pre-buying across segments in the second half of this financial year. July-August onward we should start seeing the decline narrow even further, and growth to return in the festive season around September-October, as companies start building inventory again.

Companies are telling us that autos, two wheelers and four wheelers are not selling because of the NBFC glut. But for a genuine buyer there is enough money available with top-tier PSUs and private banks. Are they simply making excuses?
Financing definitely is an issue, not so much from the banking industry perspective but more from the NBFC angle. NBFCs generally have very high exposure to the rural segment, and other segments like the taxi segment. And even in the SME space where a lot of customers do not have formal income documents, NBFCs are preferred to the banking space. To that extent, there obviously is an issue and certain segments have impacted it more. There has also been a big issue in inventory funding for dealers and that has led to rationalisation of channel inventory. Last two-three quarters we have seen huge stress on that front and it still continues. So, while on the retail financing front things are stabilising, on the channel inventory fund things are still as bad as they were in the last three-to-four months.

Can you highlight some companies that will continue to underperform and see a prolonged slowdown in terms of volume? And what is going to be the silver lining that will enable them to cross this rough patch?
As far as wholesale numbers are concerned there could be decline across segments, which should narrow. I think more than wholesale, how things are shaping up on the retail front needs to be seen. And in the passenger-vehicle front, there are definite signs of improvement. Though that could be because of pre-buying ahead of the price hike that most companies have announced for July due to safety norms. But there is definitely some element of recovery in the month of June. The next few months should see a recovery, especially in the passenger-vehicle space. It has been eight or nine months of very weak demand, so there is some element of pent-up demand coming into picture. And, slowly some of the factors which impacted demand -- especially the crude prices -- are easing in terms of pressure. So, next few months we should see some recovery in the passenger-vehicle space. Even two wheelers should see some growth coming back; especially around the festive season.

The commercial vehicle space and the tractor space will continue to remain weak. We know the situation of tractors in rural areas. And in the CV space, government spending has taken a knock because of the elections. So, until we see recovery on the government-spending front, CV would continue to remain weak. Though, axle load norms that impacted the demand have already been absorbed. But yes, in the second half, once the government spending resumes and pre-buying resumes, we would see recovery in the CV space. But as of now, CVs and tractors would be the two segments which will be impacted the most.

Where do you find opportunities within this decline of autos to buy into stocks? And what would you completely avoid?
We will continue to remain cautious on the two-wheeler space, even though there is near-term recovery and signs of stabilisation in demand. The challenge with respect to regulation, especially the BS-VI, will lead to another 8% to 10% cost hike; that is significant for the two-wheeler customers. So we continue to remain cautious on two wheelers. We prefer Maruti mainly because there are some signs of demand stabilising and second, the franchise remains quite strong. This will help them maintain 50% plus market share and there are no major signs of threat to that. So, Maruti would be preferred in the overall auto pack, whilst remaining cautious on two wheelers.

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