Outlook for auto sector robust despite weak Oct volumes

Product launches to drive incremental volume growth for players such as Maruti Suzuki; medium and heavy commercial vehicle revival on track

Consumers may not have queued up to buy motorcycles or passenger cars in October, but the Street is confident that the sector will clock double-digit volume growth in this financial year. As volume growth since April has been very strong, the sector seems to have run out of steam in October. Most automakers other than Ashok Leyland and TVS Motor saw their year-on-year volumes fall, despite heavy discounts. A reason was that  the festive season was spread across September and October, unlike last year’s bunching in October. The medium and heavy commercial vehicles (MHVC) segment has grown in double digits in October, thanks to the base effect playing out. Volumes of light commercial vehicles continued to decline in October.

Analysts believe recovery in MHCV segment should sustain, as sentiment on the economy is improving and lead indicators of the CV industry suggest recovery is well on its way. Motilal Oswal Securities says freight rates and fleet operators’ utilisation rates have turned positive over recent months.

Despite disappointing numbers in October, the Street is factoring in a double-digit volume growth in FY15. Growth in the passenger vehicle segment is expected to be driven by new launches, while the two-wheeler segment will be driven by double-digit demand for scooters. Maruti, the country's largest passenger vehicle maker, saw volumes decline one per cent year-on-year and eight per cent month-on-month.

According to Antique Stock Broking, Maruti's volumes declined one per cent due to lower production days in October, a temporary logistical issue on the back of adverse weather in the port area, and curtailment in Alto production. However, domestic volumes grew one per cent to 97,069 units. The Ciaz has done well for the company and monthly volumes are stable at 6,000 units.

In the two-wheeler segment, Bajaj Auto volumes remained flat, while Hero MotoCorp reported an eight per cent decline compared to last year. The only outlier in the space was TVS Motor, which reported a 22 per cent growth. Mahindra & Mahindra also saw its tractor volumes decline 18 per cent to 30,800 units.

Analysts believe that companies which have a strong product pipeline would have an edge over those with no new launches lined up. Even if demand revival is not in line with the market's expectations, Kim Eng Securities expects automakers to meet their targets for FY15. The brokerage says: “A near-term positive would be a two-four per cent increase in price by automakers, to pass on cost increase.”