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01 Jun

Tough for industry to crank up quickly: TVS Motor Company

Update on the Indian Equity Market:

On Friday, NIFTY ended up 90 pts (+0.9%) at 9580 levels ahead of the release of GDP data for the January-March quarter of 2019-20 (Q4FY20). Among the sectoral indices, REALTY (4.3%), PHARMA (3.2%) and FMCG (3.0%) were among the top gainers while IT (-0.1%) and MEDIA (-0.04%) were the losers.
IOC (+7.5%), WIPRO (+6.3%) and ONGC (+5.1%) were the top gainers. AXISBANK (-2.3%), BHARTIARTL (-2.3%) and ADANIPORTS (-1.5%) were the top losers.

Edited excerpts of an interview with Mr. Venu Srinivasan, Chairman, TVS Motor Company:

TVS Motor Company Chairman speaks of the challenges ahead while easing the lockdown. Mr. Srinivasan believes the devastation caused by the pandemic is not going to disappear in a hurry

• His comments on COVID-19: It is going to be a very painful period in our economic history. He thinks we have to hunker down and go through it because there is definitely no stop to this infection. The truth is that Covid-19 is likely to stay around for a long, long time to come. Being a fast mutating virus, a vaccine may not be found very quickly either. Yet, the good part at least for now is that it is not so fatal, which means we will learn to get on with our lives and live with it. As he explains, this is information based on over five months of the virus being studied internationally which, in turn, could have played a key role in prompting many countries to ease up their lockdowns.
• During this time, there have been more updates coming in about Covid-19 and many Indian States have decided to open up factories in recent weeks. However, the recovery process will take time, especially when you have clogged all the wheels of the industry with grease which has caked and stuck. Add some rust to this and it is obvious that you cannot just switch it on and expect it to run.
• Srinivasan said that the top priority is to protect factories from accidents and make sure that all safety norms are in place. Right from furnaces to chemical reactors and heat exchangers, everything needs to be reset. Across the country, you have to evaluate the status of the plant and make sure that it is done in a systematic process.
• There are other challenges to contend with as the industry slowly limps back to a state of normalcy. Companies need to cope with the reality that lots of people, including the younger lot, are not turning up for work.
• For those living in containment zones, he advised them to stay there and not come to work since others will be put to risk in the process. However, there are people who are not in the containment zone but are still refusing to come to work because there is pressure from parents, spouses, children, and peers. There is a lot of fear but people are slowly coming in and we will have enough at work in TVS added Mr. Srinivasan.
• The situation is a lot more complex for ancillary suppliers, especially the small ones, categorized as Tier 2/3 vendors. These entities employ a lot of migrant labor who are clearly in no mood to return to the cities in a hurry.
• He also stated that migrants who have gone back with great difficulty to their villages while paying large sums of money. Some have even entirely lost their savings and they are not going to come back just because you say jobs are open from tomorrow.
• In this backdrop, he believes that it will take four to twelve weeks for “this wheel to start up and get running”. It is not as if everybody is going to come to work because factories are open, especially when it involves units which are further down the automotive supply chain. These encompass smaller ancillary suppliers with low value-added manual jobs and the impact will be even more significant for them. In and around Chennai, continues Srinivasan, there is a large migrant population in these small and medium auto ancillary units. Likewise, the construction industry is also “largely migrant-driven” and a major provider of employment.
• Given the situation, whatever we do, the industry cannot crank up that quickly. And once we crank up, he is not sure if demand is going to come back that quickly either said Mr Srinivasan.
• In other words, it is not just a question of production but also of demand which will take a few quarters coming through the system.
• He said that it is anybody’s guess if it will be two or three quarters even while pessimists are talking of six quarters. We have to see it day by day.
• No wonder he describes this as “an unprecedented situation” where the whole world has been compelled to opt for a lockdown. India was no exception to the rule either.
• He also added that when Covid first struck, there was nothing known about it and we had to take drastic action to protect our society. A few months have gone by and serious studies have shown that there is going to be no quick breakthrough in a vaccine.
• The good news for India is that the fatality rate is very, very low, unlike North America or Europe which have seen huge losses of lives. The next step, according to Srinivasan, is to evaluate the cost of livelihoods lost versus lives lost and the right thing to do now is to gradually and selectively open up the economy.
• However, this has to be done with care, especially if there is a big spread and hence the need for a phased/gradual manner he said. It is also clear now that it is better to quarantine the vulnerable part of the population rather than the whole country.
• WFH positives: From TVS Motor’s point of view, the entire exercise of working from home (WFH) has had some interesting positives. He observed a lot of staff functions that are not needed any more. Similarly, area and regional offices are not needed either since many of the people can work from home elaborated Srinivasan.
• Likewise, travel can reduce by up to 50 per cent on an average, especially air travel, which will come down dramatically. As he puts it, there is so much time lost going to the airport, being screened amid tight security before flying out and then spending time on the road all over again before reaching the final destination. We now realise that any time we went to meet someone for an hour, we ended up travelling seven hours from Chennai to either Mumbai or Delhi. Now, with digital taking over in the Covid-19 world, many meetings can be done comfortably online. Yet, it is not as if the physical part will be taken over completely since we also need to see people in board meetings and their body language, especially if someone is objecting to a certain proposal.
• He further added that there is the limitation of video conferences, where one only sees the person who is speaking. All meetings cannot happen online.
• According to Srinivasan, it is also difficult to predict all the changes that will happen in a post-Covid world. One school of thought subscribes to the belief that everyone will be hesitant to travel by public transport and private ownership of cars and two-wheelers will grow.
• From Srinivasan’s point of view, the positives will be better hygiene standards at least till the fear lingers and some paranoia persists. Likewise, he adds, personal space/distancing will grow with hugging and physical displays of affection taking the backseat.
• On the business side, digital buying of vehicles will increase and customers will be happier to check out road tests, spec comparisons and reviews online before zeroing in on a certain car or two-wheeler. This will save needless trips to dealerships.
• There has been a lot of debate on the excessive dependence on China as a single supply point for sourcing components especially during the pandemic. More recently, geopolitical tensions have peaked with the US, Australia and some European nations clearly livid with China for, what they feel, its alleged role in unleashing Covid-19 on the world.
• According to Srinivasan, long supply chains are going to be suspect going forward and manufacturers will have to produce some significant quantity in the free trade region where they will be selling products. For instance, this does not have to be the US, but Canada or Mexico.
• He cites the example of TVS Motor which, two years ago, decided to go in for a de-risk strategy in sourcing from China. There was no Covid-19 in sight then but many of its Chinese suppliers relocated to India following a carefully thought out plan.
• He said that they felt that there were a dozen parts which came largely from China. Even if the value was merely 10-12 per cent, it just meant that a bike could not be produced without them. They took a decision that they had to be made here and it really helped them.
• While the lockdown pretty much ensured that the wheels of industry came to a grinding halt, the fact remained that the China shutdown was no threat to our production at all. This was not true for other automakers, who felt the pinch when supplies from China were cut off.
• With Covid-19, the need to produce closer to home has also become more pronounced. From the industry’s point of view, the pandemic has posed a huge risk in terms of wreaking havoc across the supply chain. Shutting down borders, logistics, transport and so on have only made the situation more complex in India.
• The good part is that the lockdown has seen cleaner air and rivers, which only reinforces the need to keep this going even after economic activity resumes optimally in the coming weeks. Srinivasan thinks this is also a good opportunity for the Centre to spend more on the Swachh Bharat Mission where 20 cities, for instance, can be earmarked for a zero pollution drive.
• He stated that we need rigid enforcement of laws in sewage treatment. Small industries were releasing untested sewage and this is a wakeup call for the country to take Swachh Bharat seriously in terms of recycling, cleaning and reuse.
• For the auto sector which has made big investments in Bharat Stage-VI emission standards, the key is to continue the effort towards cleaner mobility. He informed that there was some degree of over-enthusiasm to go all electric in two years, which is just not feasible.
• It is his view that the world will take a couple of years to get back to normal in an L-shaped, and not V-shaped, recovery curve. He sees this situation as an opportunity to reset use of people, buildings, energy, travel and everything in life. How much less can we live with in terms of eating out, having simpler food, not buying as many clothes or having as many haircuts!!

Consensus Estimate: (Source: market screener, investing.com websites)

• The closing price of TVS Motors was ₹ 337/- as of 28-May-20. It traded at 33.1x/21.6x the consensus EPS estimate of ₹ 10.1/15.4 for FY21E/ FY22E respectively.
• The consensus target price of ₹ 355/- implies a PE multiple of 23x on FY22E EPS of ₹ 15.4/-.

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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13 May

Maruti Suzuki to resume production with 50% workforce at Manesar plant: RC Bhargava

Update on the Indian Equity Market:

On Tuesday, Nifty ended 0.5% lower at 9,196. The top gainers for Nifty 50 were Vedanta (+12.4%), NTPC (+5.9%) and ITC (+4.5%) while the losing stocks for the day Reliance (-5.7%), GAIL (-3.7%) and Asian Paints (-3.0%). The gaining sectors for the day were Media (+1.7%), Metal (+1.2%) and Realty (+0.8%). The worst performing sectors were Pvt Bank (-0.7%), Pharma (-0.6%) and Bank (-0.5%).

Edited excerpts of an interview with Mr RC Bhargava, Chairman, Maruti Suzuki India; dated 12th May 2020 from CNBCTV18:

  • The carmaker will resume partial operations at their Manesar plant in Haryana with a 50% workforce. Manpower permission is around 75% with one shift only.
  • The Company is allowed to start operations with one shift now and it will focus on a limited number of models.
  • The Company will be able to assess the demand-side situation only after a few weeks. He added that it is difficult to predict the demand side as it is too early. The dealerships have started functioning, but not all of them are functioning. The level of inquiries is also respectable but at this moment there is some supply-side constraint.
  • The overall volumes are bound to be impacted because of the ongoing restrictions and reduced manpower capacity. Normally the workings hours for the Company are 8 hours in one shift but with the various restrictions, the working hours are expected to come down to 6.5 hours in a shift. This reduces the capacity according to him. At the same time, the Company will be operating in only one shift with all other restrictions impacting the production quantity.
  • For a clear demand side pictures, dealers should at least work for 2-3 weeks.
  • Some of the suppliers for Maruti are in the containment zones. Therefore, the suppliers cannot produce in those areas. Maruti had to look for some alternative supplier for some components. Some models of the Company cannot be produced because those components cannot be found. Thus, the Company has to adjust the production volumes and models in accordance with the supply chain.
  • There is no certainty as to which supplier will remain a supplier and that he will not come under a containment zone in the next 10 days according to Mr Bhargava.
  • The Company may also face issues because the temporary workers at their Manesar plant have gone back to their villages.
  • Maruti has given cash advance against supplies to many of its vendors.
  • Overall, the auto industry could end up with 20-25% less sales compared to last year.
  • The cars are taxed very heavily in India, making the affordability of cars an issue. He expressed hope that the government will keep taxes on cars at a reasonable level.

 Consensus Estimate: (Source: market screener website)

  • The closing price of Maruti Suzuki India Ltd was ₹ 4,955/- as of 12-May-2020. It traded at 24.9x/ 19.0x the consensus EPS estimate of ₹ 199/260 for FY21E/ FY22E respectively.
  • The consensus target price of ₹ 6,308/- implies a PE multiple of 24.3x on FY22E EPS of ₹ 260/-.

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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05 May

Will resume operations at plants only when dealerships open up – Rajiv Bajaj, Bajaj Auto

Update on the Indian Equity Market:

On Monday, NIFTY closed in red at 9,292 (-5.7%). Top gainers in NIFTY50 were Cipla (+3.7%), Bharti Airtel (+3.3%) and Sun Pharma (+0.3%). The top losers were Hindalco (-10.7%), ICICI Bank (-10.6%) and VEDL (-10.4%). Top sectoral gainer was PHARMA (+0.4%) and sectoral losers were PVT BANKS -8.6%), FIN SERVICES (-8.4%) and BANKS (-8.3%).

Excerpts of an interview with Mr. Rajiv Bajaj, managing director – Bajaj Auto with CNBC -TV18 dated 29th April 2020:

  • He expects the two-wheeler manufacturer to operate at about 50 percent capacity next month.
  • Prime Minister Narendra Modi on Monday told states that India has to work on restarting the economy as well as continue the fight against COVID-19. Several states are keen to extend the lockdown in hotspots.
  • In the last one week itself they have seen some positive developments, specifically their Pantnagar plant has been given approval progressively to operate at full capacity, which they cannot till their dealerships open up.
  • They have that approval on the supply side. Progressively they are getting the same approval for their Aurangabad plant.
  • The Chakan plant outside Pune has not received a nod for production, which is unfortunate as that is the company’s main export plant. On 28th April, they received permission to shift goods from there.
  • He said, “In the month of April, fortunately because we do export, we will see sales of something like 30,000-35,000 numbers. In May, we are looking at operating at about 50 percent of capacity across all our plants put together which points to about 200,000 vehicles. Again the majority would be for exports.
  • In June, we are hoping – subject to how things are unlocked – to record something in excess of 250,000 vehicles, which means we are about our two-third capacity. So from this point of view, it is not so bad for us but that is again because half of what we make is exported,”he added.
  • They have already implemented almost all of the cost cutting measures. It will save them somewhere between Rs 150 crore and Rs 200 crore this year.
  • What they have continued to clearly communicate to people is that there are no plans to cut jobs and they are not going to cut jobs at this stage.
  • He said, “I would make only one recommendation which is we cannot save ourselves out of this crisis. We have to sail ourselves out of this crisis. If the government cannot reduce goods and services tax (GST), there are other suggestions I had made with respect to the insurance, with respect to the absurd safety norms that were brought in last year. If those things are corrected at the front end and there is some liquidity brought in the NBFCs etc, the demand side will be fine.”

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

  • The closing price of Bajaj Auto Ltd was ₹ 2,433/- as of 4-May-2020.  It traded at 14x/ 15x/ 13x the consensus earnings estimate of ₹ 169/ 163 / 185 for FY20E/21E/22E respectively.
  • The consensus price target of Bajaj Auto Ltd is ₹ 2,998/- which trades at 16x the earning estimate for FY22E of ₹ 185/-.

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.”

By Auto, Bajaj Auto 0 Comments Read more...
22 Apr

Expect demand to pick up strongly by festive season: Vinod Dasari

Update on the Indian Equity Market:

On Tuesday, Nifty closed 3% lower at 8,981 after crude futures prices fell into the negative territory for the first time. The top gainers for Nifty 50 were Dr Reddy (+4.4%), Infratel (+2.9%) and Bharti Airtel (+2.2%) while the losing stocks for the day were IndusInd Bank (-12.3%), Bajaj Finance (-9.1%) and ICICI Bank (-8.7%). Pharma (+2.5%) was the only gainer among the sectoral indices for the day. The worst performing sectors were Pvt Bank (-5.9%), Bank (-5.4%) and Auto (-5.3%).

Edited excerpts of an interview with Mr Vinod Dasari, CEO of Royal Enfield.; dated 16th April 2020. The interview was published in The Economic Times.

  • Starting OEM factories are much easier. But there will be some deal of confusion as to which industries can start. Now there are companies in which they might have two or three plants but sometimes the plants are interrelated. So if one area cannot start but the other area is allowed to start, it could be a concern. For example, Tamil Nadu opens up but Maharashtra does not open up, the company will face supply issue which is from Pune.
  • There would be a little bit of a stuttered start but think within 10-15-day time, this will come to normal once the lockdowns are lifted.
  • According to him, the demand side will actually come back stronger for two reasons – Pent up demand and a likelihood that people will not want to travel in public transport increasing demand for cars and motorcycles.
  • April is a washout for the auto industry, May could see a good recovery month but at a slow pace. This quarter will have some impact because of the lockdown but after that, the recovery will be sharper than what people are saying.
  • For dealers, all the money that the company had with them as advance, has been returned by the company. The company has given all the warranty claims, keeping very little stocks with the dealers. Dealers carry less than 10 days’ worth of stock.
  • The company is not doing any retrenchment and pay cuts whether it is the temporary or permanent workforce. Thus, company is paying 100%.
  • The company has more than doubled its network in the last year to reach outside urban areas. This has given them good results. Thus, a combination of both the accessibility of the product and network as well as the aspirational aspect of Royal Enfield bikes will bode well for them.
  • Even in a downturn last year in their category, the company actually gained market share. For overall motorcycle, they still retained their market share despite a 15-20% downturn in the overall motorcycle market.

 

Consensus Estimate: (Source: market screener website)

  • The closing price of Eicher Motors Ltd was ₹ 13,502/- as of 21-April-2020. It traded at 18.1x/ 18.4x/ 14.8x the consensus EPS estimate of ₹ 745/ 735/ 914 for FY20E/ FY21E/ FY22E respectively.
  • The consensus target price of ₹ 18,679/- implies a PE multiple of 20.4x on FY22E EPS of ₹ 914/-.

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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17 Apr

India will bounce back faster- Mr RC Bhargava

Update on the Indian Equity Market:

On Thursday Nifty closed marginallyhigher at 8,993. Among the sectoral indices NIFTY IT (-1.8%), NIFTY FMCG (-O.59%) closed lower. NIFTY Media (+2.6%), NIFTY Bank (+1.8%) and NIFTY Pharma (+1.8%) closed higher. NTPC (+6.9%), VEDL (+5.2%) and Hindalco (+5.1%) closed on a positive note.HCL Tech (-4.0%), Tech M(-3.8%) and Kotak Bank (-3.3%) were among the top losers.

Excerpts from an interview of Mr.R.C.Bhargava, Chairman, Maruti Suzuki India with ET Now on 15th April 2020:

  • Speaking about the partial lockdown, Mr. Bhargava said starting their own undertaking or factory is not enough as all other components required in cars must be available. That means all the company’s vendors must be functioning anywhere in the country.
  • But as per the current situation, this is not likely to happen because several vendors are in the containment zone and that is one issue.
  • If the company can get all the components by finding alternative sources and get the retail going, then all systems will be in place for starting production.
  • According to him, even if the lockdown is lifted on May 3rd, still the company will have to monitor the situations in red zones.
  • He refrained from giving any guidance as it will depend on the productions and kind of demand that gets developed in the market.
  • Speaking on change in consumer behavior of a car buyer, he said there is one school of thought which says that there is a likelihood of consumers holding back because of the uncertainty about what is happening and not making big-ticket purchases. There is another school of thought which points out what happened in China where after the lockdown was lifted, consumers started to buy more and more personal transport because they are reluctant to use public transport. Now here in India, the situation could be either of the two or something in between.
  • Cost-cutting and becoming more competitive was even earlier a very important thing for India but now, it is something which has become much more important now than it ever was.
  • It is an area where both industry, as well as governments, should pay attention because competitiveness is going to be the key going forward.
  • In his opinion, it will be a challenge for companies which are not cash rich. The promoters and management will have to live a frugal life so that more cash can remain within the company.
  • Speaking about the changes in the way a car is sold, he said the company had experienced a sharp uptick in the number of digital enquiries. People will still come to showrooms and the company will ensure every possible safety measure is taken.
  • India will bounce back much faster because of the demand situation in India and if the measures taken by the government do resolve in making the manufacturing more competitive, then the economy will bounce back faster in India than any other place in the world.
  • Speaking about launching new models he said people are developing new models and they are in different stages of development and there is no particular reason for postponing the introduction of a new model.
  • The lower end vehicles will recover faster. On Job losses he added, 2020-21 may not be very exciting but there will be a lot of opportunities. It is not the time to get rid of people as it is not easy to get people with skills.

Consensus Estimate: (Source: market screener and Investing.com websites)

  • The closing price of Maruti Suzuki was ₹ 5,148/- as of 16-April-2020.  It traded at 26.4x/ 23.5x/ 18.2x the consensus earnings per share estimate of ₹ 195/219/282 for FY20E/ FY21E/ FY22E respectively.
  • The consensus average target price for Maruti Suzuki is ₹ 6,830/- which implies a PE multiple of 24.2x on FY22E EPS of ₹282/-.

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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01 Apr

Managing fixed costs is the foremost challenge- Vinod Aggarwal, MD & CEO, VECV

Update on the Indian Equity Market:

Following its global peers, Indian markets traded higher on Tuesday with Nifty closing 3.8% higher at 8,597. It was a muted day for the corporate news flow as the country is busy controlling the spread of Coronavirus. All the sectoral indices closed the day higher with FMCG (5.8%), METAL (5.2) and PHARMA (4.1%) leading the list. Within the index, BPCL (13.6%), BRITANNIA (8.6%) and GAIL (8.1%) were the highest gainers whereas INDUSINDBK (-15.1%), EICHERMOT (-2.7%) and CIPLA (-2.2%) were the highest losers.

Edited excerpts of an interview with Mr Vinod Aggarwal, MD & CEO, Volvo Eicher Commercial Vehicles, published on CNBC TV18 on 30th March 2020:

  • The Supreme Court has provided relief to the auto manufacturers by allowing the sale of BS-IV inventory for 10 days after the lockdown ends. Earlier, the last registration date for BS-IV compliant vehicles was 31st March 2020.
  • Mr Aggarwal said that the management was not expecting any relief regarding BS-IV vehicles. The biggest concern for the manufacturers is regarding registration of vehicles which have been sold. He highlighted that because of lockdown, the customers still haven’t got the registration number for the purchased vehicles and the stock is large. This is a major challenge for the CV industry and for Volvo Eicher Commercial Vehicles (VECV).
  • He said that the sales which were earlier under negotiation or finalization have been cancelled. This along with lockdown is impacting the auto industry as well as the company.
  • He highlighted that the lockdown has created cash management problem. The challenge for the company is to manage the fixed costs in the immediate future. The company has 12,000 to 15,000 employees on its payroll as well as there are other fixed expenses like rents, minimum charges for power and other security expenses for the plant.
  • He further mentioned that the second challenge is going to be the setup time to get back to the normal operations. Whenever the lockdown is opened up, the supply chain would be impacted and how fast they are able to come back has to be seen. Most of the workmen or the people who have been working on the line have migrated back to their villages. To get them back to work is going to be a very big challenge. It means that whenever the lockdown is over, it will take some time for the life to come back to normal.

Consensus Estimate: (Source: market screener website)

  • The closing price of Eicher Motors was ₹ 12,973/- as of 31-March-2020. It traded at 17x/ 16x/ 13x the consensus EPS estimate of ₹ 762/ 815/ 974/- for FY20E/ FY21E/ FY22E respectively.
  • The consensus target price of ₹ 20,030/- implies a PE multiple of 21x on the FY22E EPS estimate of ₹ 974/-
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26 Mar

Business cannot take priority over the safety of people- Mr Pawan Goenka, MD, Mahindra & Mahindra

Update on the Indian Equity Market:

On Tuesday night, PM Narendra Modi announced a nationwide lockdown for the next 21 days to fight against the spread of Covid-19. On Wednesday, NIFTY continued gains for the 2nd day and ended at 8,318 (+6.6%). This rally might be in the expectation that an economic package to counter economic disruptions might be announced soon.

Among the sectoral indices, Financials gained the most while no sector index ended negatively. FIN SERV (+9.7%), PVT BANK (+8.5%) and BANK (+8.4%), AUTO (+4.3%) were the top gainers. Out of the NIFTY50 stocks, RELIANCE (+13.8%), HDFCBANK (+12.4%) and KOTAKBANK (+11.9%) rallied the most. INDUSINDBK (-3.3%), IOC (-3.1%) and COALINDIA (-2.8%)  were among the few stocks that ended in red.

Business cannot take priority over the safety of people- Mr Pawan Goenka, MD, Mahindra & Mahindra

Edited excerpts of an interview with Mr Pawan Goenka, Managing Director of Mahindra & Mahindra; dated 23rd March 2020. The interview aired on CNBC-TV18.

  • As a contribution to tackling the Covid-19 crisis, the Mahindra Group has taken certain steps. The Group has started work on how their manufacturing facilities can be used to make ventilators. They have put their projects team on standby to assist the government or the army in erecting temporary care facilities. In addition, Mahindra Holidays will offer their resorts as temporary care facilities.
  • The foremost consideration is given to the well-being of the group’s employees. Plants in Nagpur, Kandivali and Chakan have already shut down. Over the next few days, most plants will be shut down.
  • No one is in a mood to buy cars right now. Dealerships are also shutting down due to lockdowns. The automotive business is slowing down. Tractor business is also slowing down, although not to the same extent.
  • Mahindra Group is playing it by the day as things are very dynamic. It is difficult to predict how long the shutdown will last. If lockdown lasts only until 31st March, the business that has slowed down will come back in the next 2-3 months. If lockdown lasts longer than 31st March, the comeback will take much longer.
  • Need for tractors in agriculture cannot disappear. The tractor buying peaks in May-June period. If Mahindra does not miss out this season, then the tractor business will be fine. However, to tap that season, production will have to take place in April. But in the current scenario, the business will not take priority over the safety of the Group’s people and communities.
  • For the auto and tractor business point of view, the foremost responsibility of the company is to make payments to its suppliers and low wage earners-especially the contract workers and daily wage workers.
  • Mahindra Finance is closely watching the concern of liquidity in the market. There is a concern of EMI payments not happening but that will not happen immediately. The farmers have probably already received revenue from the previous cycle and so there might not be an issue.
  • The big unknown from the perspective of Mahindra Financial is what will happen to the financial cycle, i.e money coming into the NBFC from both borrowings and EMI payments. It is very important to get that cycle going. But right now, the sales pull will also be less hence the demand for financing will be less.
  • The group has an advantage in terms of business diversification.
  • Mr Goenka is of the opinion that although the Government is also under pressure and we should not expect too much, the government has to step in at this point. Mr Goenka has mentioned three things that he expects from the government at this point:
  1. For the auto industry, the immediate issue is the 31st March deadline to liquidate BS-IV inventory. It is not in the hands of the Government as it’s a supreme court matter. Mr Goenka is hoping that the court extends the deadline and gives extra time to liquidate the BS-IV vehicles. As no OEM is manufacturing BS-IV vehicles any longer, there is no problem of excessive dumping of those vehicles.
  2. The second area where Government intervention is needed is to help in the liquidity situation. If a moratorium of say 3 months is imposed on recognition of EMI non-payment as NPAs, NBFCs will be able to have a bit of a breathing room. The government needs to ensure that the financial cycle does not break down because it will take a long time to repair if broken.
  3. Thirdly, the Government must not delay any payments due to the industry as right now the industry needs funds.

Consensus Estimate: (Source: market screener, investing.com websites)

  • The closing price of M&M was ₹ 274/- as of 25-March-2020. It traded at 7.2x/ 7.7x/ 6.7x the consensus EPS estimate of ₹ 38.3/ 35.4/ 40.6 for FY20E/ FY21E/ FY22E respectively.
  • The consensus target price of ₹ 651/- implies a PE multiple of 16.0x on FY22E EPS of ₹ 40.6/-
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23 Mar

Maruti Suzuki readies strategy to deal with coronavirus impact: CV Raman, Maruti Suzuki

Update on the Indian Equity Market:

Markets bounced back strongly to end a highly volatile week and Nifty closed 5.6% higher at 8,284. During the current week, Nifty traded in the range of 7,833 – 9,602, that’s a lot to digest for the investors! Out of fifty stocks from the index, 8 stocks traded above 10% and 31 stocks traded above 5%. ONGC (17.9%), GAIL (15.4%) and INFRATEL (14.9%) were the highest gainers. Five stocks among the index closed lower with INDUSINDBK (-1.4%), HDFCBANK (-1.3%) and ADANIPORTS (-1.1%) were the biggest losers. All the sectoral indices, FMCG (8.8%), IT (8.5%) and METAL (7.7%) led the gains. None of the sectors ended the day in the red.

Excerpts from an interview with Mr CV Raman, Executive Director, Maruti Suzuki published in CNBC TV-18 on 17th March 2020:

  • As Coronavirus is spreading fast across the world, Maruti Suzuki is working on two-pronged strategy to minimize the impact of the pandemic.
  • He said that officials at the company are assessing the impact of the pandemic on sales. The company has started focusing more on digital marketing and delivery of cars from service centres directly to customers. He mentioned that automakers have already reported a 15 per cent de-growth in FY20.
  • About the measures taken to curb the virus, he said that the company has issued advisories to its employees and suppliers. He added that the company is reducing physical contact by doing meetings through video conferencing and reducing visits of suppliers to Maruti’s offices.
  • While several automobile manufacturers have expressed concern about the impact of the disease on supply chains from China and South Korea, Raman said Maruti was in a position to manage supply chains well. He said that most of the tier-1 suppliers are in India and the company is able to get the supplies as per production requirements.
  • The Federation of Automobile Dealers have moved the court seeking a grace period for sell and registration of BS-IV vehicles after March 31 as dealers are saddled with inventory and coronavirus has impacted sales. Individual companies are also considering moving court to seek an extension. He said that for Maruti which began executing its BS-VI transition a year back does not need any intervention at this stage.
  • Introduction of BS-VI standards are set to make diesel vehicles significantly more expensive. Considering the cost implications, the company has stopped production of diesel cars for the moment but hasn’t ruled out a higher capacity diesel engine in future. The company currently has CNG variants in seven models and planning to increase the range of CNG offerings this year.
  • He refused to comment on future products but said that Maruti would be actively participating in the growing SUV segment.

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

  • The closing price of Maruti Suzuki was ₹ 5,094/- as of 17-March-2020.  It traded at 25x/ 20x/ 16x the consensus EPS estimate of ₹ 202/ 255/ 314 for FY20E/ FY21E/ FY22E respectively.
  • Consensus average target price for Maruti Suzuki is ₹ 7,246/- which implies a PE multiple of 23x on FY22E EPS of ₹ 314/- .
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13 Mar

Covid-19 impact on demand is yet to be felt in India – Mr. Sharma, Bajaj Auto

Excerpts from an interview of Mr Rakesh Sharma, Executive Director, Bajaj Auto with CNBC -TV18 dated 12th March 2020

Update on the Indian Equity Market:

On Thursday, NIFTY continued its losing streak, closing at 9,590 (-8.3%). The top losers in NIFTY50 were Yes Bank (-13.0%), UPL (-13.0%) and Vedanta (-12.6%). None of the Nifty stocks ended on a positive note. All the sectors ended on a negative note and the top sectoral losers were PSU Banks (-13.2%), Media (-10.3%) and Realty (-9.8%).

  • Speaking on demand Mr. Sharma said that the impact of Covid-19 in India is yet to be felt.
  • The supply chain is improving for Bajaj Auto and the imports from China have resumed.
  • The attendance of the tier-II, tier-III suppliers in China who supply to vendors of Bajaj Auto had dropped to 10% but now the attendance is steadily rising. Now attendance is about 75%.
  • There could be new linkages emerging between Italy, Germany, and China and if that happens the company will have to watch out but at this point, the supply chain situation is improving and the demand situation within the country is not yet seeing much of an impact.
  • Some congestion at ports is causing 6-7 days delay, but it is an insignificant issue for Bajaj Auto.
  • Speaking about the next quarter, he said, the recovery process will be slow as underlying demand was impacted because of the BS-VI shift and the sentiment is now affected because of the coronavirus.
  • Q1FY21 will be a difficult quarter, the virus will act as a negative force and adjustment of people to new cost which requires positive sentiment is difficult in this scenario.
  • Speaking about the current market scenario, he said the cost of money will not be an issue but due to the economic backdrop the logic on lending is becoming severe.
  • About the autos, he said 30-40 percent of sales in March have shifted to BS-VI.

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

  • The closing price of Bajaj Auto was ₹ 2,350/- as of 12-March-2020.  It traded at 13.5x/12.8x/ 11.4x the consensus earnings estimate of ₹ 173/ 183 /205 for FY20E/21E/22E respectively.
  • The consensus target price for Bajaj Auto is ₹ 3,280/- which implies a PE multiple of 16x on FY22E EPS of ₹ 205/-.
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04 Mar

Expect BS-VI transition costs to hit demand; outlook for April-June quarter weak, says Rakesh Sharma, Bajaj Auto

Update on the Indian Equity Market:

On Tuesday, Sensex ended up 479 pts up and Nifty above 11,300 level partly led by Reserve Bank of India (RBI) comment that it was ready to take appropriate actions to ensure orderly functioning of financial markets and preserve financial stability.

NIFTY Metal (+5.6%), NIFTY Pharma (+5.1%) and NIFTY Media (+3.3%) were the top-performing sectors. None of the sectors ended in the negative. Among the stocks, Vedanta (+8.3%), Sun Pharma (+7.2%), and Hindalco (+6.9%) were the top gainers. ITC (-0.6%) and Yes Bank (-0.5%) were the only stocks in the red at market close.

Expect BS-VI transition costs to hit demand; outlook for April-June quarter weak, says Rakesh Sharma, Bajaj Auto

Combination of a weak economic backdrop combined with added costs due to transition to BS-VI from BS-IV makes the outlook for April-June quarter quite weak for domestic business, is the word coming in from Rakesh Sharma, Executive Director, Bajaj Auto.

Edited excerpts of an interview with Mr. Rakesh Sharma, Executive Director, Bajaj Auto; dated 2nd March 2020:

When asked about the outlook for the next 2 months, Mr. Sharma stated that the underlying economic situation remains the same, which is a high single-digit decline in the retail industry and there are issues of transition from BS-IV to BS-VI, which will add costs April onwards. So, the combination of a weak economic backdrop combined with added costs makes the outlook for April-June quarter quite weak for domestic business.
He commented that exports have had an outstanding run. Bajaj Auto had the highest ever quarter in Q3. It had the highest ever sales in January with strong growth of 15% in February. He also informed that there is an Egypt issue, which is going to be finally brought to rest in April because last year it was in April when Egypt went down. So, without Egypt there has been good strong single-digit growth in the commercial vehicle (CV) business.
Speaking about Coronavirus he said that they are watchful about the impact of coronavirus as yet there is no impact in their markets. However, some disruption in Chinese supply chains of motorcycles will definitely be an area of opportunity for a company like Bajaj Auto, who commands 35% market share in Africa. Therefore, he expects the export performance to continue January and February the way it has been doing in Q3.
When asked about the auto component supply disruption due to coronavirus hitting the production of their peers like TVS and Hero Motocorp by 10% he said that they are impacted by less than 5%. They have taken steps of airlifting critical components although slightly expensive.
He informed that electric scooter had some sourcing from Wuhan itself, so that has got affected but other than that it’s a manageable situation for Bajaj Auto. If the trajectory of supply chain improvement continues as it is occurring in China, then he doesn’t see a disruption of production in April-May also.
He commented on BSIV to BSVI evolution and said that BS-IV stocks are under control. In fact, for motorcycles, there is about 20 days of sale taking February as sale and in others like commercial vehicles they are 11-12 days of sales. The company is going through an odd period where the company is running down the BS-IV and not yet being able to fully ramp-up the BS-VI. The ramp-up is expected to start to occur in March.
When asked about the price increase on account of BS-VI he said that the price increase is between Rs 6,000 and Rs 10,000 depending on the model. The 150cc plus model, fuel injection system is used the price increase is up to Rs 10,000. So the cost increase is between 6-10%.
He stated that when there was BS-III to BS-IV transition, the economic backdrop was that of growth. The major difference this time is that the economic backdrop is not very supportive and the demand will get impacted due to the price increase. He expects it will be 10-15% decline in April to August period and hopefully, when festivities kick in, they will serve as a trigger to reverse the down cycle.
When asked about the outlook for FY21E volume, he said that the second half will not be able to compensate for the double-digit decline of the first half and might end up even-stevens or slightly negative for the industry in the whole year.

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

The closing price of Bajaj Auto was ₹ 2,792/- as of 3-March-20. It traded at 16x/ 15x/ 14x the consensus EPS for FY20E/ FY21E/ FY22E of ₹ 173/184/205 respectively.
Consensus target price of ₹ 3,280/- implies a PE multiple of 16x on FY22E EPS of ₹ 205/-.

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