Rajiv Bajaj recommends 3 steps to revive growth in the auto industry

Update on the Indian Equity Market:

On Monday, NIFTY closed at 12,119 (-1.1% down its previous close).  The top gainers for the day were Dr Reddy (+5.6%), M&M Ltd (+1.9%) and CIPLA (+1.2%). The stocks that were beaten down in today’s session included Vedanta (-4.8%), Tata Steel (-4.7%) and JSW Steel (-4.3%). The only sectoral gainer for the day was Nifty Pharma (+1.5%). The top losing sectors were Nifty Metal (-3.1%), Nifty PSU Bank (-2.3%) and Nifty Bank (-1.3%).

Excerpts from an interview with Mr Rajiv Bajaj, MD, Bajaj Auto Ltd on CNBC-TV18 on 23^rd January 2020:

• Mr Rajiv Bajaj, MD, Bajaj Auto said if the auto industry has to be put back on 15 per cent growth track then the government would need to do three simple things:

1. The mandatory insurance that was brought into play in September 2018, should be rolled back.
2. Imposing the anti-lock braking system (ABS) on 150 CC or 200 CC scooters or motorcycles was complete overkill and he urges the government to consider recalibrating this to at least for 250 CC plus two-wheelers.
3. At a time when goods and services tax (GST) for electric vehicles (EVs) had been correctly lowered to 5 per cent, the government should also consider lowering GST for petrol or diesel vehicles from 28 to 18 per cent.

However, if these things are not done, then he anticipates around 20% plus decline from March or April once BS-VI prices come into play.

• The industry has been systematically done in by over-regulation. This over-regulation, whether it is of insurance or of safety norms and now BS-VI, has pushed up the cost of two-wheelers ranging from between 20% and 30%, depending on whether it is a small or a big vehicle. If one is going to have this kind of cost escalation in a 12-18-month period then it is bound to have an impact on volumes.
• Sharing his rationale for why mandatory insurance should be removed, he said that people are riding all kinds of two-wheelers, people are living in all kinds of circumstances. If somebody is buying a little vehicle that can do no more than 50 kilometres an hour, and living outside the city, there is no crazy traffic and he doesn’t have to be overly concerned as long as he is wearing a helmet then that choice should be left to him.
• When asked about rural demand growth and whether there are any signs of recovery, he said he doesn’t see any signs of that.
• In terms of sales, according to him, January is slightly better than December because December was impacted by a huge pre-buying in October. January-February would be better.
• The auto industry is going to continue to see a decline in volumes, manufacturers are also very concerned about the billing of BS-IV and how things may pan out because there are two views again, one is that in March, Companies will have a lot of pre-buying of BS-IV and the other view is that they may not.
• He said three years back when they moved from BS-III to BS-IV they had to follow their competition that put out discounts ranging from Rs 7,000 to Rs 25,000. Bajaj Auto don’t make that kind of money on most of their motorcycles. So, it is better to produce BS-VI, to let go of BS-IV because if one is left with BS-IV inventory with the dealers then between the dealer and manufacturer, the manufacturers are going to suffer a lot of pain.
• Most of the auto players will be selling only BS-VI vehicles from March – from the middle of March or so. Bajaj Auto would not want to carry BS-IV stock beyond the first week of March etc. The Company has planned their production accordingly. Thus, he added saying, “If that means we are going to lose some share in March because competition will have heavy discounts on BS-IV vehicles and push up their share for the month, we are not playing that game”.
• According to him, BS-VI models are going to be 15-20% more expensive which means a definite decline in the volumes. Thus, nobody knows the exact degrowth number but it is going to be very significant.

Consensus Estimate: (Source: market screener website)

The closing price of Bajaj Auto Ltd was ₹ 3,082/- as on 23-January-2020. It traded at 18.2x/ 17.0x/ 15.3x the consensus earnings estimate of ₹ 170/ 182/ 202 for FY20E/ FY21E/ FY22E respectively.