Sector Update | 28 December 2017
Automobiles
Auto retails weak in certain markets; rural sales healthy
Steep increase in discounts in CVs ahead of regulatory change in Jan-18
2W demand remains mixed, as the momentum gained from the wedding season in the
northern belt is partially negated by muted sales in Rajasthan, Gujarat and
Maharashtra. HMCL witnessed strong demand for motorcycles during the recently
concluded wedding season in north.
PV retails are picking up, driven by the year-end discounts and the rush to beat price
increases from January. MSIL continues to see better retails than competitors: S-cross
bookings stand at ~12k units, with a waiting period in excess of 4 weeks.
CV players are offerings steep discounts (~5% higher) and other incentives to clear the
current stock ahead of the upcoming regulatory change that makes it mandatory for all
new CVs to have air blowers (for better ventilation in the cabin) as a standard fitment
st
from 1 January 2018.
We prefer 4Ws over 2Ws and CVs due to stronger volume growth and a stable
competitive environment. Our top picks in autos are MSIL, Bajaj Auto, Tata Motors and
Amara Raja.
2Ws: Weak retails in Rajasthan, Gujarat and UP due to inauspicious period
Mr. Rakesh Srivastava,
Director - Marketing and
Sales,
Hyundai India,
said
“We foresee closing this
calendar with cumulative
retail sales of 200,000 units
in the last four months and
are cautiously optimistic of
recording double-digit
growth for the entire fiscal
year driven by improving
macro-economic factors,
stable interest rates and
booming rural markets.”
Retail demand for 2W was seasonally weak, as the Kharmas period (inauspicious
days) hurt sales in the markets of Rajasthan, Gujarat and certain regions in UP.
However, we note that off-take remains relatively good in other western
markets like Maharashtra, and southern markets like TN, Karnataka and AP.
We also note the growth rate in rural markets continues to be healthy, led by an
improvement in rural sentiment and better crop realization (of onion, cotton,
mustard, sugar cane, etc.).
Rural growth led by positive rural sentiment, increase in farm income
Channel partners of most 2W/4W OEMs have indicated a continued increase in
footfall of rural customers.
Key rural-centric markets like Rajasthan, Maharashtra, Gujarat, UP and MP are
witnessing a continued increase in inquiries and conversions, led by the
improving cash situation of farmers.
Our interaction with the channel partners indicates that central, west and north
India have witnessed better demand than other regions, primarily led by
imrproved rural sentiment on better farm income.
Based on our interaction, we note that sales related to the wedding season have
been healthy in December.
Growth should also be driven by a low base of the previous year (November
onward sales last year were impacted by demonetization).
Jinesh Gandhi
– Research analyst
(Jinesh@MotilalOswal.com); +91 22 3982 5416
Research analyst: Deep Shah
(Deep.S@MotilalOswal.com); +9122 61291533 /
Suneeta Kamath
(Suneeta.Kamath@MotilalOswal.com); +9122 61291534
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
8 August 2016
Investors are advised to refer through important disclosures made at the last page of the Research Report.
1

Automobiles
MSIL retails growing at 10-12%, indicating price hikes from Jan’18
Mr. Y S Guleria,
SVP - Marketing and Sales,
HMSI,
said
“While becoming the first
choice of the progressive
states, the next wave of
demand growth for Honda
is coming on the back of
increasing scooterization of
traditionally motorcycle-
driven states. Be it Uttar
Pradesh, Rajasthan, West
Bengal, Bihar, Odisha,
Jharkhand or Chhattisgarh,
scooters are the fastest
growing segment in these
states.”
Growth in PV demand is relatively good v/s 2W, as MSIL’s retails momentum
remains healthy across markets. Retails are healthy due to seasonal higher
discounts and the rush to avoid price increases from January.
Response to the recently refreshed S-cross remains encouraging, with a waiting
period of 4-6 weeks. Bookings at the pan-India level (as indicated by one of the
channel partners) are approaching 12-13k units (v/s average monthly wholesales
of ~2.1k in FY18 YTD). The waiting period for Baleno and Brezza is still healthy at
4-7 weeks, while Dzire is now largely available off-the-shelf due to an increase in
supplies of the new Dzire.
Ciaz sales are recovering back to normal levels in markets like Tamil Nadu. Ciaz
demand is better than HMIL’s
Verna.
Non-Nexa models are also witnessing retail growth of 8-10%. Channel partners
in rural areas are indicating retails in excess of 12-14%.
As indicated by most of the channel partners, MSIL is considering price increase
from Jan-2018.
Channel partners indicated that with rural demand coming back, there have
been increasing inquiries for the entry-level motorcycle segment in rural areas.
Motorcycle sales in key agriculture-driven states like UP, Bihar, MP and
Rajasthan grew 29%, 17.4%, 22.7% and 10.5%, respectively, in 1HFY18.
As indicated by the leading channel partners, despite HMSI being aggressive in
pushing scooter products, the company has not managed to crack rural markets
due to strong brand recall of Hero and preference toward motorcycles.
However, HMSI is targeting healthy growth in scooters in these states.
HMCL too is offering cash back of INR1,500 per unit (v/s HMSI’s and TVSL nil
cash back) to gain market share in the scooter segment.
Healthy motorcycle growth in agri-driven states
Higher discounts in CVs in a bid to clear inventory and gain market share
Our interaction with the CV channel partners indicates an increase in retails for
M&HCV, led by the likely impact of pre-buy due to the upcoming regulation that
makes it mandatory for all new CVs to have air blowers (for better ventilation in
the cabin) or AC as a standard fitment from 1
st
January 2018.
Discounting continues to remain high and rise sequentially, as volumes push to
gain market share continues.
Segmentally, tippers and road construction, mining applications trucks are
witnessing better demand.
Seasonal freebies/discounts in other segments too to clear inventory
HMCL is offering cash discount of INR1,500 per unit on scooters range, while
TVSL and HMSI are not giving cash discounts on any models.
Bajaj Auto is extending two-year free insurance on all its products, as retails are
relatively mild.
On the PV front, MSIL is offering incentives in the form of exchange bonus/gift
cheque across models (except new launches), which is in the range of INR35-50k
per unit.
28 December 2017
2

Automobiles
Valuation and view
We prefer 4Ws over 2Ws and CVs due to stronger volume growth and a stable
competitive environment.
While we expect 2W volumes to benefit from a rural recovery in the near term,
competitive intensity remains high in the segment due to changing customer
preferences.
Our top picks in autos are MSIL, Bajaj Auto and Tata Motors.
We also consider MM as the best bet on a rural market recovery.
In the 2W space, we have
Buy
rating on BJAUT and EIM, and
Neutral
on HMCL
and TVSL.
Comparative valuations
CMP
(INR)
Auto OEM's
Bajaj Auto
Hero MotoCorp
TVS Motor
M&M
Maruti Suzuki
Tata Motors
Ashok Leyland
Eicher Motors
Auto Ancillaries
Bharat Forge
Exide Industries
Amara Raja Batteries
BOSCH
Endurance Tech
3,301
3,714
763
750
9,631
418
118
29,952
731
219
846
20,064
1,368
Rating
TP
(INR)
4,197
3,819
764
839
9,866
575
134
34,653
844
254
856
19,965
1,334
P/E (x)
FY19E FY20E
17.6
19.1
29.5
17.4
25.3
6.5
18.9
28.2
28.1
22.6
24.8
33.3
37.3
15.2
17.4
21.9
15.7
21.5
6.1
14.3
22.4
21.7
18.8
20.2
27.6
28.2
EV/EBITDA (x)
FY19E FY20E
13.4
12.1
19.3
13.4
16.5
2.8
9.6
23.6
16.8
13.6
12.5
20.5
18.1
11.2
10.9
14.4
11.8
14.3
2.4
7.3
19.4
13.5
11.5
10.2
16.9
14.6
RoE (%)
FY19E FY20E
26.8
31.1
35.6
14.6
23.0
28.3
25.2
35.0
23.2
13.7
18.1
18.1
22.8
27.3
29.7
35.8
14.9
22.9
23.1
28.2
33.2
25.0
14.8
19.1
19.5
25.2
Div Yield (%) EPS CAGR (%)
FY19E FY20E
FY18-20E
2.3
2.4
0.5
1.3
1.0
0.1
1.9
0.6
0.7
1.0
0.6
1.0
0.5
2.6
2.4
0.7
1.3
1.2
0.1
2.1
0.7
0.9
1.5
0.8
1.2
0.9
18.2
7.9
52.9
12.4
24.7
67.0
35.3
27.5
32.8
21.1
21.8
26.1
32.6
Buy
Neutral
Neutral
Buy
Buy
Buy
Buy
Buy
Buy
Buy
Buy
Neutral
Buy
28 December 2017
3

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28 December 2017
4