Auto Sales Seem to Have Clearly Beaten the GST blues

Across the board, the auto sales numbers for the month of July 2017 had one little story. The spectre of GST which was being feared by most analysts almost seems to be missing. Almost, across the board, the domestic auto sales numbers have been extremely flattering. What does this mean and what does it hold for the attractiveness of auto stocks in India? It may be recollected that June 2017 sales of automobiles had been slightly disappointing due to the apprehensions ahead of the launch of GST on July 01st. Most companies then had focused more on inventories rather than production. However, it now appears like auto companies appear to have gotten over their GST blues and have reported a healthy growth in July. Here is how…

How the passenger cars segment panned out…

As usual the segment continues to be dominated by Maruti with monthly sales growing by 22% to 153,298 units. The sales momentum in Maruti has picked up in July after the initial GST teething troubles have been overcome. While the second largest car market in India, Hyundai India, has grown at just about 4.4%, there are a number of interesting companies that are growing rapidly and vying for the third spot in terms of auto sales. Both Mahindra & Mahindra as well as Honda Motors, who have been the most promising among the next level of car makers, have shown 22% growth for the month of July 2017. Interestingly, even Tata Motors which had major worries about its domestic passenger car business has shown a growth of 10% for the month. The quicker sales of passenger cars were principally driven by 2 factors. Firstly, the good monsoon has created robust demand for entry level cars from rural and semi-urban segments. Secondly, in the aftermath of the GST most of the car markets have cut their prices in line with lower GST burden. This benefit pass-through was one of the key reasons for the spurt in auto sales in July.

Even two wheelers have shown a revival…

After some disappointing performance on the domestic and the exports front, the sales of two-wheelers saw a smart recovery in the month of July. The big story is that Honda Motors, which had already overtaken Bajaj to the second position, is fast catching up with the current leader, Hero MotoCorp. Interestingly, both Hero Moto and Honda Motors were partners in the JV before they want their separate ways a few years ago. Both Honda Motors and Hero saw sales growth in the range of 17-19% for the month of July 2017. Royal Enfield of the Eicher group leads the pack with 21% growth but that is a more premium offering with a smaller yet attractive market base. Bajaj Auto was the only disappointment where domestic sales fell by -5.4% and export sales fell by -9.8%. Bajaj is really feeling the pressure of Honda Motors taking away a chunk of incremental two wheeler sales. Even in case of two-wheelers, the boost came from discounts post-GST as well as smarter demand from rural and semi-urban areas post the good monsoon forecasts. Bajaj disappointed domestically due to tight competition and globally some of its key markets like Africa and Latin America are seeing demand contraction due to weak oil prices.

There are green-shoots in the CV and tractors segment…

The big take-away from the July auto numbers is that there is a clear recovery visible in the CV and the tractors segment. Both Tata Motors and M&M saw a sharp 15% growth in their CV business. This business is critical from a macroeconomic standpoint as it is indicative of a likely recovery in the capital investment cycle. In the CV segment also, the manufacturers have made an effort to pass on the lower GST to the end consumer in the form of lower prices. That has also helped a pick-up in demand. It may be recollected that in June the CV segment had shown a 20% fall in sales numbers due to GST apprehensions. Comparatively, the numbers have surely picked up in the month of July.

Bajaj Auto may have been an exception but generally the auto numbers have been encouraging across the board. All the three key segments viz. passenger cars, two-wheelers and CVs showed robust growth as GST linked discounts were passed on in the form of price cuts. There were also signs of a pick-up in rural and semi-urban demand on the back of a good monsoon. We will have to wait for ratification of the sustainability of this trend in the next few months. But the good thing is that the auto segment appears to be the first one to put the GST blues behind them. That may be the big news on the auto front in the month of July 2017.