Auto

21 Nov

“Royal Enfield’s looking to create a new product every quarter”- Vinod Dasari, CEO, Royal Enfield

Update on the Indian Equity Market:

On Wednesday, NIFTY closed 0.5% higher at 11,999. Zee Entertainment (+8.1%), Sun Pharma (+5.3%) and IndusInd Bank (+4.9%) were the top NIFTY50 gainers. Infratel (-3.2%), IOC (-1.5%) and Kotak Mahindra Bank (-1.4%) were the top NIFTY50 losers. Among the sectors, NIFTY Pharma (+3.3%) and NIFTY Media (+3.2%) were the sectoral indices that closed positive. NIFTY Realty (-1.5%) and NIFTY PSU Bank (-0.7%) were the worst-performing sectors.

Excerpts from an interview with Mr Vinod Dasari, Chief Executive Officer, Royal Enfield published in  Livemint on 20th November 2019.

  • He looks at downturn or short term difficulties as a blessing in disguise and according to him, one should never let go of a downturn as an opportunity.
  • Looking at the long-term picture, whether it is their processes or manufacturing plant, they continued with the capex and completed it.
  • Vallam phase II is done now, they have the capacity of a million bikes, they are not going to build any new big plants anytime in near future.
  • The first strategy that they had is that they connected marquee rides to their hobbies. Every rider can do something to support a cause. So, when one thinks about Royal Enfield rider, one thinks of a gentler soul.
  • The second major thing was making the stores much more accessible. Over the last ten years, there were 900 outlets across the country and mostly in cities but they came up with this concept, a Studio Store and they initially planned to put up around 200 stores during the year.
  • But by October, they put up 500 and those are doing extremely well. More than 90% of them are profitable within two months. That has increased the reach and more and more people who are worried about not getting service they now want to do.
  • Historically, whatever Royal Enfield was making was selling. When the downturn came, it was a blessing in disguise. They thought why they should make this and tell the customer you must buy this, they will make whatever is available for customers to choose. So customer chooses the colour, the branding etc.
  • In November 2019, they launched ‘Make-Your-Own’. This is the first time in the world somebody can actually – on their mobile phone choose graphics, choose accessories, choose all of that and the order goes directly to the factory. So they brought down stock so much, they have less than three weeks stock now.
  • In our country like many other places, a lot of things happen on sentiment. When they see that they had a record retail sale that helped boost the morale, reduce inventory, our dealers are excited.
  • All those 500 studio stores that they have, 100% of them were done by existing dealers. That shows the confidence their dealers have in Royal Enfield and the product plans and things that they are willing to do.
  • 90% of their sales were coming from products sold in India, less than 5% was from outside; this is a year ago, and less than 5% was from the aftermarket. In the long term, they will significantly want to grow that percentage from outside India and as much they get from the aftermarket.
  • They had 900 stores in India, they have 600 outlets outside India, and in places like Barcelona, Madrid, Paris, London, all of these places where people go and visit and they see a Royal Enfield and they say this is our country’s product and I should buy it in India or wherever they go from.
  • They are proud of the fact that an Indian company based in Chennai exporting worldwide and giving riding experience worldwide.
  • The CKD plant will be announced shortly in the next few months. It is very small; it is maybe a USD 1 million investment. So, no plan changes.
  • Good thing is even though they had a 20% volume drop in wholesale, revenue drop was only 9% and that was because they had newer products like the Interceptor with much higher average selling price than compared to a Bullet.
  • They have had growth in the export market that has a much higher revenue base. So, according to him, they will not see a 10% growth, but they will continue to try and do as well as they did last year.

Consensus Estimate (Source: market screener and investing.com website)

  • The closing price of Eicher Motors Ltd was ₹ 21,485/- as of 20-November-2019. It traded at 28x/ 25x/ 22x the consensus EPS for FY 20E/ FY 21E/ FY 22E of ₹ 774/ 870/ 998 respectively.
  • Consensus target price of ₹ 20,606/- implies a PE multiple of 21x on FY22E EPS of ₹ 998/-.

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06 Nov

“The worst is behind us” says Ashok Leyland Chairman.

Update on the Indian Equity Market:

On Tuesday, NIFTY closed 0.2% lower. Bajaj Finance (+3.3%), Bharti Infratel (+3.3%) and Yes Bank (+3.2%) were the top NIFTY50 gainers. Zee (-3.7%), Indusind Bank (-2.3%) and Ultratech Cement (-2.2%) were the top NIFTY50 losers. Among the sectors, NIFTY FMCG (+0.3%) was the only sectoral index that closed positive. NIFTY MEDIA (-1.4%), NIFTY PHARMA (-1.1%), NIFTY METAL (-0.9%) were the worst-performing sectors.

 “The worst is behind us” says Ashok Leyland Chairman.

Excerpts from an interview with Mr. Dheeraj Hinduja, Chairman, Ashok Leyland broadcasted on CNBC on 5th November 2019.

  • Demand slowdown has been caused by multiple issues including issues faced by financing companies and the availability of liquidity in the market.
  • Last financial quarter is traditionally a strong quarter for Commercial Vehicle (CV) OEMs. 4QFY20 will be a strong quarter followed by a slow 1QFY21 due to the technology transition from BS-IV to BS-VI.
  • Management is looking forward to FY21. Historically, the year of transition is a strong year.
  • The transition from BS-IV directly to BS-VI in a 3 year period is one of the shortest transition times globally. Other countries have taken 7-10 years in which period the cost absorption has been done in a phased manner. There will be a significant cost-push on account of the transition.
  • Even post the cost-push due to BS-VI, management says Ashok Leyland will be cost-competitive as ever. The customers will see real value in products launched.
  • Looking forward, there are some good signs such as many initiatives that the government is taking and the revival of financing. Most of the OEMs have now corrected the state of their inventories that had built up. The next few months look to be quite positive.
  • The market is not going to recover overnight, but the worst is behind for Ashok Leyland.
  •  It’s been a year since the previous CEO, Mr. Vinod Dasari quit.  Search for the CEO is on. FY20 is a year of important changes with respect to BS-VI, their new modular platform and the introduction of a whole line up of LCV products. The Board had taken a decision that they did not want a major disruption in the Management at this important juncture.  But a new CEO is required and the Board will be announcing a successor in the next few months.
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05 Nov

Growth at Bajaj Auto has outperformed industry

Update on the Indian Equity Market:

On Monday, Sensex ended at record closing high of 40,302, up 137 pts; Nifty ended at 11,943; IT index was the biggest sectoral gainer, while auto stocks bled the most. Infosys share price closed 3% higher at Rs 709 after the firm said it has not received any prima facie evidence so far to corroborate any of the allegations made by the anonymous whistle-blower. Infosys, VEDL, Tata Steel, HDFC, ONGC were among the biggest gainers, jumping up to 3%. On the other hand, Maruti Suzuki, Hero MotoCorp, IndusInd Bank, Tata Motors were among the biggest losers, shedding up to 2.5%. Among sectoral indices, NIFTY IT (+0.8%) NIFTY Metal (+2.8%) closed higher while NIFTY Auto (-1.4%), NIFTY media (-3.3%) ended on a negative note.

Growth at Bajaj Auto has outperformed industry

Key takeaways from the interview of Mr Rakesh Sharma, Executive Director, Bajaj Auto; dated 4th November 2019:

  • Mr Sharma stated that the company reported the highest ever retails of all business in its history by a wide margin. The motorcycle business turned in a retail sales performance of 400,000 units plus, which is ~50% growth YoY. It grew by 28% over the festive period of last year. Small commercial vehicle (CV) business reported retail sales of 43,000 plus and KTM business doubled reporting the highest ever retail performance. So, it was a wonderful month for Bajaj Auto and the company is happy that almost half of the growth in domestic motorcycle by newly launched products (in the last six months) which have done exceedingly well and brought down the inventory levels.
  • Mr Sharma said that they had proactive engagements with the channel where it was informed that come October Bajaj Auto will be easing the burden.
  • Mr Sharma added that he has not seen such low channel inventory in the last 18 months and suspects that the company should have moved the market share needle as well.
  • When asked about the future performance he said that the economy is entering a naturally lower part of the quarter now. Post the festive seasons, the sales do drop so there is obviously a combination of postponement that has occurred from July-August and a bit of advancement that would have occurred from November. All of these combine to give the surge during the festive season. So, there is a natural down cycle that we will now hit and added on this will be the uncertainty in the minds of a lot of people about the BSIV-BSVI transition.
  • He refrained from commenting that Bajaj Auto would see similar kind of numbers, but he confirmed that this festival season has served as a very good trigger to bottom out what the Indian industry was experiencing.
  • Mr Sharma said that the company still needs to navigate the turbulent change that is impending, which is BS-IV to BS-VI, and will have to see how the consumer behaviour will occur during this change.
  • Mr Sharma informed that Bajaj Auto has always been outpacing the market by 5-8% points and thinks that Bajaj Auto outpaced the industry growth by at least 15% points on the back of new products. Therefore, he is confident of market share expansion.
  • When asked about the price cuts and margins he commented that the company’s strategy of uplifting the consumer step by step has helped the realisation per vehicle to move upwards. The stocks are now in a very manageable zone.
  • Mr Sharma said that softer raw material costs, steady foreign exchange rate (45% of revenues come from overseas sources), improved portfolio and favourable business mix is contributing to margin expansion but would not like to further comment on margin as they are in an ambiguous situation in November-December-January.

Consensus Estimate (Source: market screener website)

  • The closing price of Bajaj Auto was ₹ 3,212/- as of 04-November-19 and traded at 18.4x /17.2x /16.7x the consensus EPS for FY20E / 21E / 22E of Rs 176/188/194 respectively.
  • Consensus target price of ₹ 3,049/- implies a PE multiple of 15.7x on FY22E EPS ₹ 194/-.
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24 Oct

Festive season: A hope for automakers

Update on the Indian Equity Market:

On Wednesday, NIFTY closed 0.1% higher. Among sectoral indices NIFTY PSU Bank (+2.1%), NIFTY Auto (+1.3%), NIFTY IT (+1.0%) closed higher while NIFTY Media (-1.3%), NIFTY Realty (-0.9%), NIFTY Metal (-0.3%) ended on a negative note. The biggest gainers were HCL tech (+3.5%), Eicher Motors (+2.5%), Infosys (+2.3%) whereas Adani Ports (-6.1%), Bharti Airtel (-3.7%), Zeel (-3.4%) ended with high losses.

Excerpts from an interview of Mr Vinkesh Gulati, Vice President FADA (Federation Of Automobile Dealers Association)

  • The entire auto sector in our country has shown a downturn. With all major OEM’s showing a decline in number, it is the festive season which gives hope to automakers.
  • Mr Gulati says sentiment during festive season goes up and enquiries start to come in. Passenger vehicle (PV) segment is showing similar signs this year too.
  • It is expected that better conversions will happen as compared to the last six months.
  • He says the two-wheeler market is not showing good signs. The overall situation in the two-wheeler market is grim.
  • In the past year, the passenger vehicle (PV) segment has shown decline of 8-10 percent. This year the expected decline is less 1-2 percent or similar as last year.
  • The two-wheeler segment is expected to degrade and continue to decline around 8-12 percent.
  • Mr Gulati says the reason behind the decline of the 2-wheeler segment is because it is a reflection of rural and semi-urban market sentiment.
  • 2 wheelers segment is majorly based in the rural and semi-urban market and the sentiment there is still not changed. Rural market is still not picking up festive hype.
  • He says Automakers are offering steep discounts to increase sales and the festive season is the best time to buy.
  • Speaking on the discount front, he says, discounts are similar to what they were in Navratri. Furthermore, discount is given by dealers on their own to liquidate their inventory.
  • From December onwards it is expected that all OEM’s will come out with their BS-VI variants and again during December there will be discounts on BS-IV to liquidate inventory.
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17 Oct

In 2-3 years, Bharat Forge will not look like a forging company.

Update on  Indian Equity Market:

On Wednesday, NIFTY was up 0.4% to close at 11,472 level. The top performers that aided the positive movement in the index were BPCL (+4.3%), Bajaj Finance (+3.8%) and Zee (+3.7%). Hero (-2.8%), Vedanta (-2.5%) and Hindalco (-2.4%) were the worst-performing NIFTY stocks. Among the sectoral indices, NIFTY IT (+1.0%), NIFTY MEDIA (+0.8%) and NIFTY REALTY (+0.8%) were the top gainers. NIFTY PSU BANK (-0.8%), NIFTY METAL (-0.5%) and NIFTY AUTO (-0.2%) were the top losers.

In 2-3 years, Bharat Forge will not look like a forging company.

Excerpts of an interview with Mr Baba Kalyani, Chairman and MD, Bharat Forge. The interview was published in Mint dated 15th October 2019.

  • There is some order coming back into the auto industry with retail demand beginning to increase and production being curtailed to get the inventory down. It will take a little while before the order is restored completely and growth will come after that. It will take a couple of months for the inventory to get to a proper level.
  • The largest slowdown is in domestic medium and heavy market with month on month declines of 40-50%. The industry has never seen this kind of slowdown.
  •  Among the international markets, North America and Europe are going at reasonable levels. There is some pick up happening in Brazil. The problem is in the Indian vehicle market which needs to get sorted out.
  • Bharat Forge is doing reasonably well in the railways’ segment. It is a niche market that is not high in volume. Bharat Forge has 4 customers which are the major OEMs. Along with crankshafts, the company is starting to move towards turbochargers, connecting rods. They are trying to enlarge the business by enlarging the product mix. 
  • In the aerospace segment, Bharat forge has consciously decided to move to high-value niche products. The company manufactures critical components such as turbine blades, shafts, and landing gears. They are not into the high volume structure side of the business as it has too many participants and the margins are not great.
  • It takes a long time to become a supplier in the critical components such as the turbine blades or rotating shafts. These are very critical and safety components that cannot be failing. Bharat Forge has been successful in becoming a supplier of these components and the management hopes to start seeing better volumes.
  • The current downturn, although painful, is helping the company to reshape and restructure itself from a product, process, and technology point of view. 
  • In the next 2-3 years, Bharat Forge will not be seen as a forging company. It will become a technology company.  The company is doing a lot of things in the electric vehicle space and other technology spaces. They have developed a promising new technology space using their nanotechnology expertise of converting waste to wealth. 

Consensus Estimate (Source: market screener website)

  • The stock price was ₹ 428/- as of close of 16-10-19 and traded at 20x/ 18x/ 16x the consensus EPS for FY20E / 21E / 22E EPS of ₹ 21.4 /23.5 /26.5 respectively.
  • Consensus target price of ₹ 444/- implies a PE multiple of 17x on FY22E EPS of ₹ 26.5/-.
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04 Oct

Bajaj Auto – Is the demand recovery around the corner?

Update on the Indian Equity market:

On Thursday, NIFTY closed 0.4% lower. Among sectoral indices NIFTY Metal (-3.0%), NIFTY Financial services (-1.2%), NIFTY BANK (-1.1%) closed lower while NIFTY Media (+2.5%), NIFTY PSU Banks (+0.2%) NIFTY Auto (+0.2%) ended on a positive note. The biggest gainers were Yes Bank (+33.6%), Bharat Petroleum (+7.5%), Zeel (+6.5%) whereas Vedanta (-4.7%), Hindalco (-4.0%), Coal India (-3.5%) ended with high losses.

Bajaj Auto – Is the demand recovery around the corner?

Excerpts from an interview with Rakesh Sharma – Executive Director, Bajaj Auto

  • Mr Sharma says that in the current situation retail numbers are the most important ones to look at. It was very difficult to manage the supply chain and putting it in line with demand fluctuations in the past few months.   
  • He says retail demand is showing signs of a pickup.
  • Speaking about the September month specifically, he says, retails in the second half of September have started to look up.
  • Though the company volumes are marginally lower as compared to last year, it is a good improvement in the prevailing scenario.
  • Speaking about exports he says that the global picture is pretty much stable. Africa is doing very well. The company gets 40%-45% of its business from Africa. Latin America continues to show muted growth caused mainly by the slowdown in Argentina and Mexico.
  • The Philippines is a market which the company is looking for.
  • Mr Sharma says, after a bit of a decline in 1Q FY20 the current quarter is looking much better.
  • He says the uptrend is visible in 125cc segment, mainly because of the anti-lock braking system (ABS) which increased the prices of 150cc plus segments.
  • Before the launch of Pulsar125, Bajaj Auto had a 1% market share. After its launch, it is in the range of 10%-12%.
  • Speaking about further discounts he says, they are not going to add much because the company had already announced festive schemes.

Consensus Estimate (Source: market screener website)

  • The closing price of Bajaj Auto was ₹ 2910 /- as of 03-October-19. It traded at 16.3x /15.0x the consensus EPS for FY20E/ FY21E of ₹ 178/193 respectively.
  • Consensus target price of ₹ 2832/- implies a PE multiple of 14.6x on FY21 EPS of ₹193/-
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23 Sep

Bajaj Auto: Price hike of 1% across the sports segment, 5% in Dominar 400 and Pulsar 150

Update on Indian Equity Market

A slew of fiscal measures announced by the Finance Minister on Friday morning led to a strong rally in Indian equities. The crown jewel of the fiscal stimulus package was the cut in corporate tax rate from effective 30% to effective 22% plus surcharge (net 25%) for all domestic corporates. The announcement of tax cut led to increased street earnings estimates across sectors. The surcharge on capital gains made on equity that was announced in the Budget has also been withdrawn. Nifty closed 5.3% higher at 11,274. The rally was led by NIFTY AUTO (+9.9%), NIFTY BANK (+8.3%) and NIFTY FINSERV (7.2%). All indices except NIFTY IT (-0.9%) ended in the green.

Bajaj Auto: Price hike of 1% across the sports segment, 5% in Dominar 400 and Pulsar 150

(Highlights from interview hosted on CNBC)

  •  Bajaj Auto has been market leader in the sports segment for the past 15 months and even gained market share. Market share of the sports segment is now between 35-40%.
  •  Bajaj Auto has taken a price hike across SKUs in the sports segment. Price hike across SKUs is about 1% except 2 products. 5% hike each in Pulsar 150 (passed on ABS cost which was absorbed by co. till now) and Dominar 400.
  • Bajaj Auto is 2nd after Hero in terms of market share in the commuter segment. They don’t see pricing power in the commuter segment, hence haven’t been able to take any price hikes there except in one SKU (5% share of total volumes hence negligible impact).
  • The government should clearly convey there is no GST cut on cards as right now there is a detrimental effect on the channel. Some customers are waiting in anticipation of a GST cut which is not helping at all.
  • In terms of discounts, Rajiv Bajaj said, “I expect from Hero a mother of all schemes to start very soon towards the end of this month because unless they liquidate over a million BS-IV vehicles, they are going to have trouble with BS-VI just around the corner. So I think the industry will be shaken up by a huge promotion by the market leader and in anticipation, we have to be ready for that.”
  •  3 years ago when the industry was shifting from BS-III to BS-IV, discounts ranged from Rs. 3,000 to 20,000. Not in such a panic stage this time. But there is a need to be prepared for significant impact as the channel is bursting with stock.

Consensus Estimate (Source: market screener website)

  • The closing price of Bajaj Auto was ₹ 2,739/- as of 20-September-19. It traded at 17x / 15x the consensus EPS for FY20E/ FY21E of ₹ 161 / 178 respectively.
  • Consensus target price of ₹ 2,687/- implies a PE multiple of 15x on FY21E EPS of ₹ 178/-
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21 Sep

Maruti Suzuki India Ltd (MSIL): Youngsters today find shared mobility economical

Dated 20th September 2019
Update on the market:

After the Aramco drone attack, the market sentiment still seems to be negative. Nifty closed 1.3% lower at Rs 10,704. Tata Motors (+2.0%), Coal India (+0.7%), HDFC bank (0.6%) were among the biggest gainers. Indiabulls housing (-4.6%), Zeel (-7.8%), Yes bank (-15.6%) were the losers. Among sectoral indices Pvt Bank (-1.8%), PSU bank (-2.35%), media (-4.4) closed lower while there were no gainers.

We offer research services on the Indian equity market and plan to offer investment advice shortly. For information on our services, please visit our website http://www.assetmultiplier.co.in/ 

Maruti Suzuki India Ltd (MSIL): Youngsters today find shared mobility economical

Excerpts from the interview by R.C. Bhargava, chairman, Maruti Suzuki India Ltd

  • Indian automakers are now on par with Europe and America in terms of quality but the purchasing power of domestic buyers has not grown enough to afford the increased product prices
  • The per capita income in India is almost around $2,200 (per annum) and in Europe, it is approximately $40,000. In terms of all the standards which add to the cost of the product, there is no difference between Europe and India
  • In India, the Goods and Services Tax (GST), road tax and others, are much higher than in Europe or even China for that matter. We can’t expect a country with such a low per capita income to have enough customers to have the capacity to pay this kind of money for a car and grow at 10-15% every year (in terms of vehicle sales).
  • As automobiles are 50% of the manufacturing GDP, then the sector has to grow by 15-16% per year to propel manufacturing sector to reach 25% of GDP.
  • If youngsters buy a car at the beginning of the career then they have to pay the monthly instalments. So, they have to choose what they want to do with the limited amount of money that they get because for buying a car, they may get a loan but have to provide 10% to 20% initial deposit and also pay the EMI.
  • Today, a youngster wants to buy a nice smartphone and wants to meet his friends at a restaurant and have a good time. If he buys a car, then he probably can’t do these things. So, he postpones his car-buying by four or five years or whatever time it takes him to reach a stage where he is comfortable owning a car.
  • Today, a youngster can still get his mobility through a car from Ola and Uber which is much more economical. So, what the finance minister said is 100% correct. That is what the millennial generation is thinking.
  • Regarding Gujarat plant, Company needed the capacity and earlier, they were short of capacity and there were cars on the waiting list all the time. The problem starts with people not buying and doesn’t start with production.
  • Each company has its own strategy. At the moment, Maruti hasn’t invested in any of the sharing platforms. They sell a lot of cars to Uber and Ola. They have no stake in them but they do buy their cars.

Consensus Estimate (Source: market screener website)

  • The closing price of MSIL Ltd was ₹ 5,988/- as of 19-September-19. It traded at 27x / 22x / 19x the consensus EPS for FY20E/ FY21E/ FY22E of ₹ 223 / 273 / 314 respectively.
  • Consensus target price of ₹ 6,095/- implies a PE multiple of 19x on FY22E EPS of ₹ 314/-

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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28 Aug

Most of the auto slowdown is the industry’s making

Dated: 23rd August 2019

Updates on the Indian market:

On Friday, markets closed in the green with BSE Sensex up 0.6% and NSE 50 up 0.8%. This was a reaction to the news that Finance Minister Nirmala Sitharaman was planning to hold a press conference after market hours.  The market expects a government intervention to revive the economy. The top gainers among NIFTY 50 stocks were Zee (+6.5%), UPL (+6.2%), Vedanta (+5.7%). Indusind Bank (-1.8%), ITC (-1.5%), Eicher Motors (-0.9%) were among the top NIFTY 50 losers. Among the sectoral indices, Media (+4.2%) and Metal (+3.4%) were the best performers while FMCG (-0.4%) and Private banks (-0.4%) were the worst performers.

Excerpts from an interview with Mr. Rajiv Bajaj- MD, Bajaj Auto published in mint dated 23rd August 2019: Most of the auto slowdown is the industry’s making

·       For the motorcycle industry, the YoY decline in sales is only 5-7%. This cannot be called a crisis. It is part of a normal industry cycle and a check for the robustness of a business model.

·       There are 4 areas where the auto industry has to improve before talking about government stimulus:

o   Industry’s domestic focus: Barring Bajaj Auto (40% revenue from exports) and TVS Motors (20% revenue from exports), other players have a negligible share of exports.  If companies had invested in global markets over the last 10-15 years and increased their exports, a 5-7% decline in one market would not have hurt them as much as it is hurting now.

o   Mediocre products: A lot of auto players are not able to export because their products are mediocre by world-class standards.

o   Innovation in the domestic market

o   Cost structure: Some manufacturers are guilty in terms of imposing very high fixed costs on their dealerships.  This works in good times but becomes a big burden in bad times.

·       Inventories have piled up since September 2018 when the industry was anticipating an extraordinary festive season. The situation is correcting now as nobody can hold BSIV stock for long. Therefore, there is a mismatch between wholesale (OEM to dealers) and retail (dealer to the customer) sales. The mismatch makes it look as if the industry is down by 15%-20% when in reality it is down by 5-7%. A 5%-7% retail decline is not enough for the industry to cry for help.

·       The industry has said there is a need for intervention in dealer/customer financing. Inventory financing should not be a big issue for large companies most of whom are cash-rich. In case of retail consumer financing, for a long time companies using their captive financing arms have shoved products in the hands of customers who didn’t really want to buy. This led to higher bad debts.  So pulling back of credit by some NBFCs is for a good reason.

Consensus Estimate (Source: www.marketscreener.com)

·       The stock price of Bajaj Auto is Rs 2,750/- as on 23rd August 2019 and trades at 17.2x/ 15.8x the consensus EPS for FY 20E/21E EPS of Rs 160/ Rs 173 respectively.

·       Consensus target price is Rs 2,686/- valued at 15.5x FY21E EPS of Rs 173.

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09 Aug

Mahindra & Mahindra Ltd- 1QFY20- Slowdown hurting the profitability

Dated: 8th August 2019

Quarterly Performance:

Key Highlights:

  1. Net sales were at Rs 128,050 mn, a decline of 4% YoY. The domestic auto sales volume for the quarter was 5% down YoY whereas the exports were down 20% YoY. The export sales were impacted due to the South Asia region which declined 61% YoY. The domestic tractor volumes were down 15% YoY whereas exports have shown a muted growth of 1% YoY.
  2. EBITDA stood at Rs 17,940 mn, a decline of 15% YoY. The operating performance was impacted due to subdued sales and also due to increased advertising & marking expenses.
  3. The operating margins were at 14% vs 15.8% in 1QFY19.
  4. Net profit before the exceptional income was at Rs 9,180 mn for the quarter, a decline of 26% YoY.
  5. The Company reported an exceptional income of Rs 13,600 mn for the quarter which increased the PAT by 80% YoY at Rs 22,600 mn. This was on account of gain on sale of shares by M&M benefit trust and gain on buy-back by an associate/transfer of certain long-term investments.

Management Commentary:

  • Management expects some revival in the tractor industry post-August-19. They have guided for flattish sales for FY20E. They expect a 6-8% sales volume growth for the tractor industry in the coming few months. Good monsoons, an uptick in sowing and low base effect in the 2nd half of the year could provide further upside.
  • Dealer inventory is under control. Company is only at around 2,000-3,000 tractors higher than the desired level of inventory.
  • The management has refrained from providing any industry guidance. Auto industry might see some upsides on account of decent monsoons, favourable commodity prices and pre-buying in the latter part of the year. The rate cut transmission by banks, stimulus in the form of GST rate cut and supportive govt. policies would further help the industry according to M&M management.
  • Post-BS-VI, the small engine vehicle (1.2-litre engines) would 100% be petrol variant. They expect the diesel & petrol mix to be 50:50 post-BS-VI launch.
  •  M&M took a marginal price increase in both auto and FES (Farm Equipment Segment) segments this quarter.

Consensus Estimate (Source: market screener website)

  • The closing price of M&M Ltd is Rs 522/- on 08-Aug-19. It traded at 12.6x / 12.3x the consensus EPS for FY 20E / FY21E EPS of Rs 41.56 / 42.28 respectively.
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