Automobile sales in February were good for almost all sub-segments and companies, but the performance of Tata group companies stood out. Domestic sales of Tata Motors’ commercial vehicles (CV) grew 32.8% year-on-year to 40,893 vehicles, whereas rival Ashok Leyland Ltd’s growth was 28% to 20,314 units.
The robust data vindicates statements from CV makers that replacement cycle demand is kicking in. The average fleet age needing a replacement is now 9-10 years versus 7-7.5 years before covid. A stable freight rate has complemented replacement demand. Nomura Research shows that the Truck Freight Index was up 8% year-on-year in February, though it was flat versus January.
While strong CV numbers reflect industrial demand, buoyancy in consumer sentiment was also seen in passenger vehicle (PV) sales. Here again, Tata Motors posted the best growth. Its domestic PV sales grew 34% year-on-year to 62,329 vehicles, perhaps aided by the launch of the New Sierra, an ICE (internal combustion engine) SUV with premium features. Nomura estimates 10,000 per month volumes for the Sierra. The vehicle’s popularity has prompted Tata to launch an electric version of the brand over the next six months.
Most other auto companies did well, with the notable exception being Maruti Suzuki India Ltd, with domestic PV sales flattish at 161,000. The small car (mini plus compact) segment declined by 8% year-on-year to 76,624 units even as utility vehicles rose 12% to 72,756 units. Small car sales had declined in January, too, down by 10%.
It should be noted that the segment had increased by 25% in the December quarter. So, this could be a sign that the initial euphoria from the goods and services tax cuts on small cars has waned. In fact, other PV makers that sell bigger and more expensive cars—on average selling price basis—such as Hyundai Motor India Ltd and Mahindra & Mahindra Ltd have seen 10% and 19% year-on-year growth, respectively, in the domestic market.
Two-wheelers
Within two-wheelers, Hero MotoCorp Ltd stood out with 45% domestic volume growth to 558,216 units. Hero is more of an ICE play whereas TVS Motor Co. Ltd has taken rapid strides in electric vehicles (EVs). Its domestic sales rose by 32% to 365,471 units and EV sales surged 60% to 38,386 units.
Bajaj Auto Ltd ranked third best with domestic two-wheeler volume growth of 27% to 186,164 units. Eicher Motors Ltd, the maker of premium Royal Enfield motorcycles, saw moderate domestic growth of 13% to 91,248 units.
While the sales momentum in February was upbeat, the impact on profit for both car and two-wheeler companies may not be as straightforward. Nomura analysts flagged the risk of commodity costs, particularly of steel, which are up by about 200 basis points as a percentage of average selling price from September to January.
They said there is scope for price increases to offset higher costs, especially given the GST-related price cuts of 2-10% taken recently. However, any price hike could dampen demand in entry level segments.
To be sure, a low-base effect before the GST cuts would mean auto sales volume growth for most companies is likely to look good till September. But looking beyond the GST cuts and monthly volume updates, CV companies may be better placed than PV companies due to two key factors. One, limited competition in terms of number of companies, and two, CV replacement demand is more of a necessity than choice.