Auto Sales Update - Weakness spreads ::Edelweiss,

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Weak car demand, prevalent in urban centres, has started to spread to smaller centres as well. While two-wheeler sales growth has moderated, tractor numbers were also lukewarm. The only bright spots were light commercial vehicles and exports. We maintain ‘REDUCE’ on Maruti Suzuki India (MSIL) and Ashok Leyland (ALL). Bajaj Auto (BAL) is likely to be key beneficiary of strong growth in exports and weak INR. Hence, we maintain ‘BUY’ on it. We highlight downside risk for Mahindra & Mahindra (BUY) and Hero Motocorp (HOLD).

Cars: Weakness prevails

Car makers continued to reel under adverse macro outlook and poor demand. MSIL’s domestic sales at 77,475 units were down 13% YoY. Entry-level cars were the worst affected. 

Two wheelers: Losing steam

Both BAL and TVS Motors (TVS) reported weak motorcycle sales. The latter’s motorcycle sales declined 8%, whilst for BAL’s growth was in low single digit. Sales of mopeds, primarily a rural product, dipped to 2% versus YTD growth of 12%, thus raising concerns on rural demand. Hero Motocorp defied the trend with higher sales in December compared to November. However, we learnt from dealers that its channel inventories are rising, raising questions over quality of growth. Given the weakness in domestic demand, industry focus is likely to shift to: (1) new launches; and (2) exports.

Commercial vehicles: LCVs firmly on track, MHCVs decelerate

In line with expectations, LCVs continued to grow upward of 25% as the hub & spoke model is being implemented in smaller towns. However, demand for HCVs has started to taper off as the base benefit fades away.

Tractors: Taking a breather

After a weak November, tractor demand recovered marginally in December. Mahindra & Mahindra (M&M) expects demand to rebound from Q4FY12 (Q4 is usually strongest quarter). If the weakness persists, it may pose downside risk to our FY12 sales expectation of 18% for M&M.