Auto

05 Aug

Mahindra & Mahindra Ltd: “Improvement in market sentiment & government stimulus are crucial for the auto sector to revive”

Dated: 12th July 2019

Interview by Dr Pawan Goenka, Managing Director of M&M Ltd.
Key highlights:
1) According to him, the budget was good for the long-term vision for the government but expected short- term stimuli that the auto sector needed for the next 3-4 months were missing.
2) He said that it is hard to predict what will happen in the next 2-3 months in the auto sector. The sector has seen its worst quarter this year for passenger vehicles since 2001. The closest fall was in 3QFY09 which recovered at a faster pace.
3) The industry has the resilience to recover quickly from a sharp drop that has happened and they have proven the same 2-3 times.
4) Mahindra has performed better than the industry average performance for the 1QFY20. In the month of June M&M was the only company that had positive growth in the passenger vehicle segment. The fact remains that the quarter performance was not as per the Company’s expectation.
5) According to him, new launches in the coming quarters will cause a demand a spurt.
6) With the slowdown in the industry, the commodity prices have been showing a downward trend which will help the industry to revive. The industry is not expected to increase model pricing. Thus, this will help to create a demand for the new launches by giving customer incentives or reduce the model price.
7) 1QFY20 will have a high base effect as the same period last year had delivered the highest growth.
8) The safety norms that are coming in on 1st October 2019 & the BS-VI norms will lead to a significant increase in the prices of the vehicles. That will have a downward pressure on demand again.
9) In June M&M had a 20% shutdown where they worked for 25 days in that month to manage the inventory level. The Company was trying to correct down dealer inventory which had happened successfully. M&M expects that July will not be as bad but still have a couple of days of shutdown in July.
10) August- & September’19 are the festive seasons where he expects the plants to run at full capacity.
11) For the tractor segment growth, he has slightly lowered the growth estimate from the initial growth expectations of 5%. He would revise the downward estimates after July considering the monsoon conditions. He also said that in the same period last year there was a growth of 28% YoY which will add to the downward pressure on the growth.

Consensus estimates (Source: Marketscreener website):
M&M Ltd with a closing price (as on 10-04-2019) of Rs 668/- per share trades at a P.E of 12.6x/ 12.9x/ 13.3x its earnings per share estimates of Rs 50.1/ 49.0/ 47.4 for FY20E/ FY21E/ FY22E. The consensus price target is at Rs 791/- over the next 12 months.

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05 Aug

Incentives for EVs: Push in the right direction by Government. Excerpts of an interview with Mr Rajiv Bajaj, MD, Bajaj Auto published on 11th July on the CNBC website.

Dated: 11th July 2019

• Views on incentives for promoting electric vehicles (EVs): One must be cautious as incentives that come today can go just as easily tomorrow. Manufacturers or entrepreneurs must be fixated on delivering a sustainable solution. EVs are becoming an attractive option considering the urban pollution and in that sense, the government’s push in the direction is a good idea.
• Incentives provided in the budget for EVs are significant. GST at 5% for EVs compared to 28% for IC engines, Faster Adoption and Manufacturing of Electric Vehicles (FAME) benefit of Rs 10,000 per kw and some of the reductions in the import duties will help. The government has put its best foot forward in offering a very significant package to those who are interested in putting out good quality electric vehicles. FAME benefit will be for those who are going to make EVs that meet certain quality standards, certain minimum standards in terms of various performance parameters.
• The positive side of the equation is the Government has been generous with the incentives and now it is up to the manufacturers to respond by leveraging this to put products into the market place. The negative is the draft notification that suggests that all three-wheelers and most two-wheeler should become electric by banning internal combustion (IC) engine scooters, motorcycles and three-wheelers. These two things should not be coupled in this manner that in order to encourage or promote one thing you have to artificially bury another thing which is world-class.
• Every member of the Society of Indian Automobile Manufacturers (SIAM) is developing EVs and everyone will be in the market with their own EVs in the very near future, in the next 12 months or less.
• It should be a phased transition to EVs as making 25 million two-wheelers and three-wheelers is not a switch that can be switched on or off overnight. The Government might be overestimating what can be done in the immediate term and underestimating what can be done in a medium-term future like 10-years.
• Bajaj Auto is working toward launching EVs (both 2-wheelers and 3-wheelers) just before implementation of BS-VI norms in April 2020. It would be a good time for EVs to make their way to market because people will be very sensitive to the subject of the environment at that time and current vehicles will get much more expensive because of BS-VI norms.
• Bajaj Auto is part of an industry that is experiencing great difficulty in terms of demand. Nobody knows exactly why the demand is low, nobody knows how this can be resolved or by when things will settle. Everybody is also concerned with what will happen when the next step of BS-VI comes into place and prices go up even further. These are very volatile, very uncertain, very difficult times where one has to just stay the course and wait it out.

Consensus Estimate (Source: www.marketscreener.com) 
• The stock price of Bajaj Auto is Rs 2,740/- as of close price of 11th July 2019 and trades at 15x / 13x the consensus EPS for FY 20E/21E EPS of Rs 186/214 respectively. 
• Consensus target price is Rs 2,831/- valued at 13x FY21E EPS of Rs 214.

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05 Aug

Eicher Motors (EICHERMOT IN): 1QFY20 Volume decline increases the margin pressure

Dated: 1st August 2019

1QFY20 Results
• Eicher Motors (EICHER) reported a ~7% YoY decline in revenues in 1QFY20 at Rs 23,819 mn (v/s Rs 25,478 mn in 1QFY19). The volumes declined by 18% YoY to 1,83,589 units. The effective realisation increased by 14% YoY from Rs 1,12,455 per unit in 1QFY19 to Rs 1,28,616 per unit.
• EBITDA declined by 24% YoY to Rs 6,145 mn and EBITDA margin declined by ~600 bps YoY to 25.8%. The margins were impacted by the increase in costs related to the ABS (Anti-Lock Braking System) conversion. 
• The effective tax rate was lower by ~290 bps YoY to 33% for 1QFY20. The consolidated PAT stood at Rs 4,518 mn, lower by 22% YoY. 
• The Volvo Eicher JV performance: The volumes in 1QFY20 were lower by ~18% YoY. The revenues reported a lower decline of 14% YoY to Rs 22,550 mn due to the realisation growth by ~5% YoY. The EBITDA margins declined by ~360 bps YoY to 5.6%. The JV reported lower profits of Rs 383 mn in 1QFY20 v/s Rs 1,182 mn in 1QFY19. EICHER’s share in JV profits stood at Rs 209 mn, a decline by ~68% YoY.

Management Commentary

• EICHER increased the dealer network by 13 dealers to 928 from 915 in 4QFY19. EICHER management is keen on focussing on increasing reach in rural areas by adding more touchpoints. Eicher also intends to expand its international presence by increasing the exclusive international store count from 48 now to 80 over the next 18 – 24 months.
• Management maintained the CAPEX plans of ~Rs 7,000 mn for FY20 for Phase-2 of Vallam Vadagal plant, construction of the Technology Centre, development of new products and to expand RE’s portfolio for global markets. The production will start in 1-1.5 months.
• Management maintained the production guidance for FY20E is 9,50,000 units. EICHER mentioned that the festive season sales will be key monitorable and the industry may also benefit from the pre-buying before the BS-VI implementation in April 2020.

Consensus Estimate (Source: market screener website)

• The closing price of Eicher was Rs 16,570/- as of 01-Aug-2019. It traded at 19x / 18x / 17x the consensus EPS for 20E /21E /22E EPS of Rs 852/ 943 / 991 respectively. 
• Consensus target price of Rs 19,441/- implies a PE of 20x on FY22E EPS of Rs 991/-

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