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Passenger vehicles sales: 4 wheels do well, 2 wheels slip again; Maruti Suzuki is Nomura’s top pick, Hero MotoCorp to be worst affected

The 2W industry growth is likely to continue to report declines (down ~7% y-o-y in Feb-17).

Four-wheelers should deliver healthy growth in Feb-17, led by strong demand for new launches in passenger vehicle (PV) segment and moderate pre-buying in medium and heavy commercial vehicle (MHCV) segment. Two-wheelers (2Ws) are likely to continue to decline as retail sales still remain slow on account of demonetisation and inventory levels are on the higher side.

We expect the PV industry to report healthy growth of 11% y-o-y. Strong waiting periods of recent launches (Brezza, Baleno, Ignis and Creta) are likely to keep growth momentum healthy. The MHCV segment should report 6% y-o-y growth supported by moderate pre-buying as prices are likely to rise (5-6%) from April 2017 onwards as BS-4 emission norms become mandatory. Still the pre-buying offtake is much slower than earlier expectations.

The 2W industry growth is likely to continue to report declines (down ~7% y-o-y in Feb-17). This should be driven largely by Hero Motocorp (HMCL IN, Neutral), which could see 14% decline due to slow demand. We maintain Buy-rated Maruti Suzuki (MSIL IN) as our top pick in the sector. We see structural headwinds to MHCV industry growth in FY18-20F due to price hikes of 5-6% in April 2017, efficiency gains due to GST and dedicated freight corridor ramping up. Thus, we expect -5%/5% growth in FY18/19F. We maintain our Reduce rating on Ashok Leyland (AL IN).

MHCVs: Industry to report 6% growth y-o-y

We expect Ashok Leyland to report 9% y-o-y growth in domestic MHCV, while Tata Motors (TTMT IN, Buy) is likely to report 2% y-o-y growth. VECV overall CV volumes are likely to be up 7% y-o-y.

PVs: We expect 11% growth

We expect MSIL to report strong 20% growth in domestic volumes due to healthy retail growth and strong waiting period of new launches. MM UV volumes are likely to decline 14% y-o-y. Other unlisted peers are also likely to see healthy volume growth.

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Two-wheelers: Industry likely to decline 7% y-o-y

We expect HMCL to be impacted worst, with a 14% decline. For Bajaj Auto (BJAUT IN, Neutral), we expect 11% y-o-y decline in domestic motorcycles. Exports (+15% y-o-y) should be better – on a low base leading to a 3% decline in overall volumes. Royal Enfield should see healthy 24% y-o-y growth. TVS’ overall volumes are also likely to decline 1% y-o-y.