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01 Dec

Short term challenges persist– Minda Industries

Update on the Indian Equity Market:

On Wednesday, Indian benchmarks ended in green with NIFTY closing at 17,166 (1.0%). Among the sectoral indices, PHARMA (-1.6%), HEALTHCARE (-1.9%), and CONSUMERDURABLES (-0.4%) were the only losers. PSU BANK (+2.7%), METAL (+2.3%), and BANK (+1.9%) led the gainers. Among the stocks, INDUSINDBK (+5.8%), JSWSTEEL (+5.0%), and TATAMOTORS (+4.3%) led the gainers, while CIPLA (-4.4%), DIVIS (-2.3%), and ULTRACEMCO (-1.5%) led the laggards.

Short term challenges persist– Minda Industries

Excerpts of an interview with Mr Sunil Bohra, Group CFO, Minda Industries with CNBC-TV18 on 30th  November 2021:

  • There’s a significant impact on volumes in Europe, with the numbers down significantly at ~30% sequentially. The important thing to notice is that the volume numbers are also down year on year indicating the severity of the impact on a low base.
  • The recovery is expected to be volatile as the true impact of the new variant remains to be seen. International travel has also been impacted, it is expected that volumes will continue to be depressed until restrictions are eased.
  • The Industry is currently working to minimise the impact of low volumes through various cost optimisation measures, however, there’s a lack of assurance as to when will the volumes recover whether it will be in Q3 or Q4FY22.
  • However, the Industry expects pent up demand and volume recovery post this crisis to continue and thus keeps its long term outlook of double-digit growth unchanged.
  • Semi-conductor shortage volatility is expected to continue till H1CY22. There is some recovery seen, however, it’ll take another 6-8 months to indicate a semblance of normalcy. Over-stocking of inventory due to the existing shortage crisis is creating a mismatch between actual demand and supply further worsening the situation.
  • EV segment is at a nascent stage, but the company expects demand to grow exponentially once it picks up. The company is focusing on creating a base for this additional supply. The company benefits from having an agnostic product supply- i.e. it is ICE/EV neutral and the company plans to add value-added products to specifically cater to EV segments and has already launched 9 new products.
  • The company’s ICE toolkit currently tickets at Rs 7,000/-, however, the company’s new EV Value-added toolkit tickets at Rs 28,000/- The company will benefit from increased EV volumes and it’ll be margin accretive in the long run.

Asset Multiplier Comments

  • The auto industry has been severely impacted by intermittent lockdowns and supply chain issues, however, the underlying demand for the industry is set to stay and only increase in the medium term.
  • EV segment is a very value and margin accretive segment for the company, the recent shift in demand to EVs will augur well for the company’s profitability in the medium term.

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

The closing price of Minda Industries was ₹ 899/- as of 01-December-21. It traded at 69x/ 41x/ 32x the consensus EPS estimate of ₹ 13/ 22/ 29 for FY22E/ FY23E/FY24E respectively. The consensus target price of ₹ 927/- implies a PE multiple of 33x on FY24E EPS of ₹ 29/-.

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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16 Sep

Semiconductor shortage to persist – Motherson Sumi

Update on Indian Equity Market:
On Thursday, markets ended on a high with Nifty closing 110 points higher to close at 17,630. INDUSINDBK (+7.3%), ITC (+6.6%), and SBI (+4.5%) were the top gainers on the index while GRASIM (-1.8%), BHARTIARTL (-1.3%), and TCS (-1.3%) were the top losers for the day. Among the sectoral indices PSU BANK (+5.4%), PRIVATE BANK (+2.7%), and BANK (+2.2%) were the top gainers, while MEDIA (-1.7%), METALS (-0.6%), and IT (-0.6%) were laggards.

Excerpts of the Interview with Mr VC Sehgal, Chairman of Motherson Sumi with CNBCTV18, dated 15th September 2021:

A lot of struggling semiconductors manufacturers are coming back on stream. However, with the uncertainty and guidance from manufacturers, the company expects this issue to persist beyond Q2CY22.
The sophistication required and the manufacturing processes of these semiconductor chips are extremely complex, the current structural barriers faced by these manufacturers can’t be removed overnight.
Demand has picked up for the entire sector, however, there’s a rise in inventory for OEMs as manufacturers wait for semiconductors to be supplied to complete the production and deliver the automobiles.
OEMs like Motherson Sumi are agnostic towards the engine that is fitted into the automobile, whether EV or ICE. However, the shift towards EV is value accretive for the company.
PLI scheme is more focused on technology transfer and development than actual production, however, these schemes coupled with the EV push by the government will result in robust demand for OEMs.
Raw Material price hikes and other margin pressures are a function of cycles and thus the company is not planning to take any aggressive steps to counter it. Right now the focus is only on delivering on the pent-up demand as fast as possible.

Asset Multiplier Comments:
Semiconductor shortage is an issue that’s going to persist for the upcoming quarters and is universal. The Auto and Ancillary Sector has to bear the brunt until things get better.
Motherson Sumi by the virtue of its product portfolio is indifferent to the ICE/EV competition, thus it is better placed for robust growth ahead once the supply side issues subside.

Consensus Estimates (Source: market screener website):
The closing price of Motherson Sumi was ₹224/- as of 16-September-2021. It traded at 32x/20x/17x the EPS estimate of ₹ 7/₹ 11/₹ 13 for FY22E/23E/24E
The consensus price target is ₹ 256/- which trades at 19x the EPS estimate for FY24E of ₹13/-
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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19 Apr

Semiconductor shortage to resolve in 3-4 months: Eicher Motors

Update on Indian Equity Market:

An alarming increase in the number of Covid-19 cases resulted in a bloodbath in India’s Equity Markets, with Nifty slipping 258 points to 14,359. Adani Ports (-4.8%), Power Grid (-4.1%), ONGC (-4.0%) were the top losers on the index while Dr Reddy’s (+1.4%), Britannia (+0.9%), and Cipla (+0.9%) were the top gainers for the day. Among the sectoral indices, PSU Bank (-4.3%), Realty (-4.1%), and AUTO (-2.8%) led the losers while Pharma (+0.2%) was the only index to end in the green.

 

Excerpts of Interview with Mr. Vinod Dasari, Whole-time Director, Eicher Motors and CEO, Royal Enfield with CNBC-TV18 dated 16th  April 2021:

 

  • Demand has picked up strongly owing to backlogs from last year. The industry is facing some problems due to fresh restrictions owing to the rising COVID-19 cases. 
  • Learning from the past lockdowns, the industry is better equipped to deal with the short-term uncertainties and continue to keep up with the demand in the short term.
  • Royal Enfield expects supply-chain constraints in the first couple of months of FY22 and expects the recovery to be along the lines of FY21.
  • Metals inflation is putting pressure on margins, and the import restrictions on steel have resulted in an increase of 20% in prices which is unfathomable.
  • Optimistic about the semi-conductor and Anti-lock braking system (ABS) shortages, in the short run, there’s a notable pressure however recovery is expected within the next 2-3 months as all the stakeholders are coordinating to mitigate the issue.

 

Asset Multiplier Comments:

  • Demand is poised to recover in the FY22, however, Q1FY22 may see muted growth due to lockdowns and supply-side issues.
  •  As witnessed in Q4FY21, the demand is robust irrespective of the ongoing pandemic, the outlook for the auto industry is favourable for FY22 subject to supply-chain improvements.

 

Consensus Estimates (Source: market screener website):

 

  • The closing price of EICHER MOTORS was ₹ 2,377/- as of 19-April-2021.  It traded at 27x/ 21x the consensus EPS estimate of ₹ 87/ ₹ 115 for FY22E/23E respectively.
  • The consensus price target is ₹ 3,105/- which trades at 27x the EPS estimate for FY23E of ₹ 115/-

 

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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08 Apr

Uptick in demand to continue for the next 1-2 quarters – SAIL

Update on the Indian Equity Market:

On Thursday, the Indian equities ended with gains despite the weekly options expiry led volatility. The Nifty50 ended at 14,874 (+0.4%) lower than the day’s high of 14,984. METAL (+3.9%), IT (+1.2%), and REALTY (+0.8%) led the sectoral gainers while PSU BANK (-0.9%), PRIVATE BANK (-0.6%), and BANK (-0.6%) led the losers. JSWSTEEL (+9.6%), TATASTEEL (+5.4%), and SHREECEM (+4.8%) were the top gainers among Nifty50 components. SUNPHARMA (-1.1%), INDUSINDBK (-1.1%), and SBILIFE (-1.0%) led the laggards.

Excerpts of an interview with Ms. Soma Mondal, Chairman, Steel Authority of India Ltd (SAIL) published in The Economic Times on 7th April 2021:

  • There are three reasons why steel prices are among the highest in a decade. One, there have been supply-side constraints, even in the second and third phase of Covid, which has impacted the ramping up of capacities in certain parts of the world. Second, China is expected to close down some inefficient units as they have a target for reducing carbon footprint. Last, being raw material supply constraints have led to a rise in iron ore prices. These factors are driving steel prices up and the demand has picked up.
  • The uptick in demand is likely to continue for the next 1-2 quarters. As prices go up, many closed capacities expected to open up, supply constraints will be eased. The increased supplies are expected to put downward pressure on prices.
  • As the vaccination drive in on, the Covid situation is expected to come under control. This will lead to some pick-up in production, which is currently hampered due to increasing Covid cases.
  • The Company is focusing on reducing its borrowing. In April-20, the debt was Rs 520 bn, which was reduced to ~ Rs 350bn by March-21. They would like to bring the debt level even more because they want to start the next phase of expansion.
  • A total focus on the balance sheet, increased volume thrust on increasing efficiencies, reducing cost, and techno economic improvement will help improve the balance sheet and leverage position.
  • The conversion costs are high for SAIL because of wages and salaries. At higher volumes, this would go down. They are reducing their manpower, hence they are not recruiting as much. With a balanced approach to recruitment and increasing their volumes, the cost of production and conversion costs will be reduced.
  • Their primary aim is to meet the domestic demand and having a strategic presence in the export market.
  • With major capacities not coming up anywhere other than in India, she expects the demand and prices to remain strong. With a lower leveraged position, SAIL would plan the next phase of expansion.

Asset Multiplier Comments

  • The demand from the auto, construction, and white goods sector and infrastructure focus by the Indian government has led to the creation of demand for steel.
  • The strong demand and rising prices since the easing of lockdown restrictions are expected to continue driving the profitability of Indian steel manufacturers.

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

  • The closing price of SAIL was ₹ 96/- as of 08-April-2021. It traded at 7x/ 6x the consensus earnings estimate of ₹ 14.6/ 15.8 per share for FY22E/FY23E respectively.
  • The consensus target price of ₹ 82 implies a PE multiple of 5x on FY23E EPS of ₹ 15.8/-.

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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02 Jul

Steel consumption up in sectors linked to rural economy – Tata Steel

Update on the Indian Equity Market:

On Wednesday, Nifty ended 1.2% higher at 10,430. The top gainers for Nifty 50 were Axis Bank (+6.3%), UPL (+5.3%), and Bajaj Finserv (+5.2%) while the losing stocks were NTPC (-2.1%), Nestle (-2.1%) and LT (-2.0%). Sectoral gainers for the day were PSU Bank (+3.6%), Bank (+2.8%) and Financial Services (+2.7%) while the losers were Pharma (-1.0%), Realty (-0.7%) and IT (-0.2%).

Edited excerpts of an interview with Mr TV Narendran, CEO & MD, Tata Steel Ltd; dated 30th June 2020 from Economic Times:

  • The Company had tough six-seven months of the financial year starting from April last year till maybe October or November. Things started looking up after November. The demand started picking up. January to June is a peak season for steel consumption in India. So the steel demand was picking up. Apart from the auto industry, other industries were looking better and the steel prices were moving up. The Company started sensing things were going wrong because of the pandemic. It impacted them in Europe in February and they knew it was going to come to India as well. Tata Steel started taking some precautions by the end of February in India.
  • Prices in India were static because there were no sales but the fact that inventories were building up meant that all Indian producers were trying to export. So the export markets were crowded with Indian suppliers towards the end of March and early April.
  • By the end of April, China started pulling in quite strongly so a lot of steel exports started going to China. The Company saw a recovery of the international markets starting in April.
  • Between April, May, and June, steel prices have gone up by about $50 a tonne. The fact that Indian steel producers could export and had an export option, kept the domestic prices quite stable.
  • There was some pricing pressure because the prices have been trending upwards till March. There were some price corrections in May when the transaction started but the international prices were quite strong.
  • Consumption growth was seen in sectors which are linked to the rural economy.
  • In the automotive business, the tractors business has been reasonably strong. Motorcycles have been stronger than scooters because they are both dependent on the rural economy.
  • Rural infrastructure spending by the government has been positive. Tata Steel sells a lot of steel i.e., about 20% of their revenues, to the rural economy. The roofing sheets and reinforcing steel for the individual house builders segments are panning out strong.
  • The non-tractor and non-motorcycle automotive commercial vehicle, passenger vehicles are still quite a weak sector. There is some sign of improvement. Any improvement is only going to get them back to where they were last year and not where they were a year before last. So, it is a long haul back for them, according to Mr Narendran.
  • Tata Steel saw an EBITDA improvement in Kalinganagar and Jamshedpur of about Rs 2,000-2,500 a tonne Quarter on Quarter (QoQ) which was on the back of cost takeout and price hikes. Tata Steel would have sold at least half a billion tonnes more had there been no lockdown. This would have helped them in cost as well as realisations. They have lost half a billion tonne of March sales which was at the highest price.

Consensus Estimate: (Source: market screener website)

  • The closing price of Tata Steel Ltd was ₹ 324/- as of 01-July-2020. It traded at 6.8x the consensus EPS estimate of ₹ 47.8 for FY22E.
  • The consensus target price of ₹ 376/- implies a PE multiple of 7.9x on FY22E EPS of ₹ 47.8/-.

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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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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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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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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