Automobiles a Washout Month; Path to Recovery Gradual Sector Update
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Automobiles A washout month; path to recovery gradual Sector Update Sector: Automobiles As anticipated, automotive volumes (except tractors) were near zero in April 2020. Automotive production and dealerships were shut last month due to View: Neutral lockdown because of COVID-19. Major OEMs such as Hero MotoCorp, Bajaj Auto, TVS Motor, Maruti Suzuki and M&M reported zero domestic sales. OEM’s like M&M, TVS Motor and Bajaj Auto witnessed few sales in the export markets (mostly liquidating some plant inventory) as port clearances were given gradually. Tractor companies witnessed some wholesale volumes as Active coverage universe tractors were classified as an essential category and tractor dealerships were Companies CMP Reco. PT (Rs) open in April 2020. The Central government has provided some relaxations (Rs) to restart automotive production from May 4, 2020 (except containment Maruti Suzuki 4,891 Hold 5,500 zones) and with requisite approval from respective state governments. Some of the OEMs like Bajaj Auto, Hero Motocorp and M&M have commenced Hero 2,002 Buy 2,200 Motocorp operations at partial capacity and other OEMs are also planning to restart production with limited output. Dealerships are obtaining permission from Bajaj Auto 2,441 Buy 2,625 state authorities to restart operations as they come under the Shops and TVS Motors 311 Hold 350 Establishment Act and the government has provided relaxations to open M&M 357 Buy 435 standalone shops (except containment zones). Automotive volumes are Ashok 49 Hold 50 expected to remain under pressure in the near term as production ramp-up Leyland will be only partial (in initial stages) & demand impact due to the slowdown Apollo Tyres 89 Buy 116 in economy because of COVID-19. Greaves 76 Hold 90 Sector Outlook Cotton Demand to be under pressure in the near term; expect recovery from FY22: In order to prevent the spread Of COVID 19; the government announced lockdown for six weeks starting March 24, 2020 to May 3, 2020. The government has further extended lockdown from May 4, 2020 to May 17, 2020 but has issued relaxations to start industrial activities and standalone shops from May 4, 2020 (except in the containment zones). However, the restarting of activities would be at partial utilisation initially with strict safety measures while the containment zone would continue to remain locked.The economy is likely to take time to reach normalcy. Leading agencies such as CRISIL and the World Bank have slashed India’s FY21 economic growth forecast to 1.5% - 2.8% from 4.8% - 5.2% earlier. Slower economic growth is likely to impact discretionary purchases such as automobiles and we expect the demand to remain under pressure in the near term. We expect recovery from FY2022 as long-term growth triggers, such as lower vehicle penetration and favourable demographics, are intact. Moreover, pent-up demand (automotive volumes have been under pressure for the past six quarters) and pick-up in economic growth (post normalisation) would lead to a recovery from FY2022. Price chart 120 Sector View 100 80 Stay Neutral; prefer a selective approach: Nifty Auto Index has corrected by 60 about 21% in the past two months (compared to a correction of 18% in the 40 Nifty) after the COVID-19 outbreak and lockdown announced by the Indian 20 0 government. Most automotive stocks have corrected sharply and are currently 19 19 19 19 20 19 19 20 20 20 20 19 19 - - - - - - - - - - - - - trading at 15%-45% below their historical long-term average multiples. The Jul Jan Jan Jun Oct Apr Sep Dec Aug Nov Mar Mar May demand is expected to remain under pressure in the near term on account of Nifty Nifty Auto a slowdown in economic growth. Further, dealer support from Auto companies may also impact their margins in the near term. Hence, we stay Neutral on the automobile sector and prefer a selective approach. Preferred picks: We like companies that are relatively less impacted by COVID-19 such as Balkrishna Industries and M&M (67% and 35% revenue from agriculture, respectively). We also prefer companies having a strong balance sheet and cash position and are leaders intheir respective segments such as Hero MotoCorp, Exide Industries and Mayur Uniquoters. Key Risks : 1) Prolonged Coronavirus infection in India;and 2) Delayed recovery in economic growth and consumer sentiments. May 04, 2020 7 Sector Update Valuation CMP EPS P/E (x) Company Reco PT (Rs) (Rs.) FY20E FY21E FY22E FY20E FY21E FY22E Maruti Suzuki 4,891 Hold 5,500 191.9 174.0 218.4 25.5 28.1 22.4 Hero Motocorp 2,002 Buy 2,200 156.9 144.6 158.8 12.8 13.8 12.6 Bajaj Auto 2,441 Buy 2,625 168.5 162.9 174.9 14.5 15.0 14.0 TVS Motors $ 311 Hold 350 13.4 12.8 15.3 21.0 21.8 18.3 M&M @ $ 357 Buy 435 28.6 21.6 24.2 8.1 10.8 9.6 Ashok Leyland 49 Hold 50 2.1 1.2 2.8 23.8 39.6 17.3 Apollo Tyres # 89 Buy 116 9.3 11.1 12.9 9.5 8.0 6.9 Greaves Cotton 76 Hold 90 7.2 5.5 5.9 10.6 13.9 12.9 Soft Coverage: Balkrishna Industries 880 Positive 49.9 51.9 63.9 17.6 16.9 13.8 Exide Industries $ 147 Positive 9.4 8.5 9.6 11.2 12.4 11.0 Sundram Fasteners # 296 Neutral 16.5 12.9 15.9 17.9 22.9 18.7 Alicon Castalloy Limited # 219 Positive 39.6 26.3 18.8 24.9 8.3 11.7 Mayur Uniquoters 148 Positive 19.7 17.0 16.5 19.9 8.7 9.0 Bosch 9,927 Positive 369.4 375.5 433.7 26.9 26.4 22.9 @-MM & MVML; #- Consolidated; $ core business valuation Key takeaway from April 2020 sales and key management commentaries: Two-wheeler segment: All two-wheeler players - Hero Motocorp, Bajaj Auto and TVS Motor reported zero domestic wholesales on account of production shut down due to COVID-19. Dealerships were also closed on account of lockdown in April 2020. Bajaj Auto and TVS Motor reported some export volumes as ports gradually gave a clearance and they liquidated plant inventory. TVS reported exports of 9,600 units as compared to 318,000 units in April 2019 while Bajaj Auto reported sales of 37,800 units as compared to 423,300 units in April 2019. Bajaj Auto commenced operations with partial capacity at Pantnagar and Waluj in last week of April 2020. Hero Motocorp commenced manufacturing with partial capacity at its Haridwar and Daruhera plants from May 4. Bajaj Auto expects gradual ramp up in capacity and gradual opening up of the automotive dealerships. The company expects to reach 75-80% production capacity by festive season of September 2020. Management expects the demand to recover in the festive season driven by pent up demand. Hero Motocorp have announced financial support to dealers. Hero Motocorp has increased the dealer margins per vehicle from May 1, 2020 to provide support to dealers. Also,HeroFincorp (financing arm of Hero Motocorp) would provide funds at subsidised rates to dealers so that they can make wage payments and rentals & would also provide financial support towards interest on dealer stocks. Passenger vehicles Passenger vehicle players such as Maruti Suzuki and Mahindra & Mahindra reported zero domestic sales in April 2020 as production facilities and dealerships remained closed in April 2020. Maruti Suzuki and M&M reported some export volumes as ports gradually gave clearance. Maruti exported 632 units as compared to 9,177 units in April 2019. M&M exported 733 vehicles as against 2,118 vehicles in April 2019. M&M started production with partial capacity at its automotive plants situated at Nashik and Haridwar plants.Maruti Suzuki has received approval to operate Manesar and Gurugram plants with partial capacity but is yet to commence operations. May 04, 2020 8 Sector Update Maruti has opened up some dealerships in the green zones. More dealers of Maruti will open up dealerships after receiving approvals from state government. M&M PV dealers would also open after obtaining requisite state approvals. Commercial vehicles Both Ashok Leyland and Tata Motors are yet to reveal the sales numbers for April 2020. But we reckon the numbers would be near zero given the closure of manufacturing plants and dealerships. Ashok Leyland has received approval to start operations at Alwar, Bhandara and Pantnagar plants but is yet to commence operations. Both Ashok Leyland and Tata Motors have pitched for incentive based scrapping scheme to boost demand for commercial vehicles. Companies believe adequate incentives would spur the demand for commercial vehicles as well as reduce pollution levels. Tractors Tractor players reported some sales in April 2020 as tractors come under essential category. Tractor dealerships were open in the last week of April 2020. M&M reported sales of 4,772 tractors in April 2020 as compared to 28,552 units in April 2019. Escorts sold 705 units as compared to 5,264 units in the month of April 2019. Both M&M and Escorts are yet to commence manufacturing operations at their tractor plants. The company’s are liquidating plant and dealer inventory and would commence operations gradually. Wholesale volumes trend (no of units) Company Jan-20 Feb-20 Mar-20 FY2020 Apr-20 Bajaj Auto 394473 354913 242575 4615212 37878 TVS Motor 234920 253261 144739 3263468 9640 Hero Motocorp 501622 498242 334647 6409719 - Maruti Suzuki 154123 147110 83792 1563297 632 Mahindra & Mahindra Auto 52546 32476 7401 476043 733 Mahindra & Mahindra Tractors 23116 22561 13613 301915 4772 Escorts 6063 8601 5444 86018 705 Source: Company Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.