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Spark Capital - Auto Sector: Freight rate hikes fail to sustain; UV incumbents face competition.




Spark Capital Advisors(India) Private Limited


19 Jul 2013





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Freight rate hikes fail to sustain; UV incumbents face competition. The truck rentals which began to increase from April onwards driven by summer crop harvesting declined in June and continues to remain weak as of mid July. Part of the decline is attributable to monsoon resulting in lower goods movement, however, the decline despite rising diesel prices is an indication of low fleet utilizations. We believe this does not bode well for a recovery in M&HCV demand and expect volumes to remain muted until signs of increasing utilizations emerge. Further, given the continued low industrial output in the South, we understand that outbound traffic and rentals from South India are low. However, this has resulted in a lack of availability of returning trucks for which the rentals have increased. Passenger car volumes declined 9% yoy. Diesel car volumes continued to decline in most models although there were signs of stabilization in some. In Hyundai’s i20 for example, June was probably the first month where petrol variants outsold the diesel variants. The diesel mix for Maruti at 67% in June (70% for Swift & 65% for Dzire) was lower than levels seen in 4QFY13 at 76%. The UV segment has seen moderation in demand for the established models and increased competition from the Ford EcoSport launch. The new launch enabled a growth of 7.7% for UV volumes excluding which volumes declined 2.9% yoy. Despite the recall of 972 vehicles, we understand the EcoSport has received ~30,000 bookings. M&HCV volumes declined 22% driven by a 17% decline in Passenger Carriers and a 23% decline in the goods segment. The 12 to 16T goods segment continued to lead the decline with a 34% crash in volumes on top of a 11% decline in June 2012. The 16-25T followed with a 25% decline on top of a 30% decline in June 2012. The >25T segment which is the only one where low base has been of support so far posted a decline of 8% in June. The YTD decline in >25T category stands at 5%. ICVs continued to perform relatively better than the 12-25T segment and declined 12% yoy. We believe the outlook for rural demand health remains strong given the strong Kharif sowing season. Total sown area of Kharif crops as of July 12th stood at 51.77mn hectares vs 34.15mn hectares last year. This in our view, should enable robust growth for Hero MotoCorp and M&M’s tractor volumes. Motorcycle volumes declined 9% while scooter volumes grew 15% yoy. Honda’s growth was the strongest at 19% driven by 16,704 units of Dream Neo despatches and ~3,200 units of CB Trigger dispatches. Volumes for Hero were down 10% yoy driven by a decline in Splendor volumes partially offset by growth in HF Deluxe and strong growth in Glamour 125. Bajaj’s domestic volumes declined 25% partly due to the production disruption at Chakan. Volumes for TVS declined 7% and the Phoenix on which hopes of a revival in the executive segment was pinned on turned in volumes of 5,358 units after peaking at 10,196 units in February 2013.

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