Automobiles Difficult quarter; outlook positive Sector Update

As expected, Q1FY21 was a tough quarter for the automotive industry, Q1FY2021 Results Review witnessing weak revenue and margin performance. Topline of the Sector: Automobiles automobile universe (ex-) fell by 65% y-o-y (broadly in line with our estimates of a 67% y-o-y fall). Topline was impacted Sector View: Positive by the nationwide lockdown in April 2020 to contain the spread of COVID-19. While the lockdown was lifted partially in May 2020, production and sales resumed only gradually. Automotive OEMs Our coverage universe were most impacted, with topline falling 69% y-o-y. Auto-ancillary companies garnering revenues from the replacement market, which CMP Companies Reco. PT (Rs) witnessed a faster pick-up in May and June 2020 were less impacted, (Rs) with revenues declining by 46% y-o-y. Operating margins of the 6,912 Buy 6,925 Sharekhan Universe plunged by 1,120 bps y-o-y to 1.9% (margins 2,959 Buy 3,500 lagged estimates of 3.7%). A huge negative operating leverage led TVS Motors 442 Buy 470 by a steep fall in topline, affected margins. While the automotive universe’s gross margins improved by 350 bps y-o-y to 40% due to Hero Motocorp 2,995 Buy 3,300 soft commodity prices and a better mix it was not sufficient to offset M&M 609 Buy 750 the negative operating leverage, as companies operated at a much 69 Buy 72 lower capacity utilization of 25-30%. Automotive OEMs reported 123 Buy 135 an EBITDA loss (OPM of -0.7%) with margins contracting 1340 bps Greaves y-o-y; while auto ancillary companies reported relatively better 80 Hold 95 Cotton performance with a 730 bps y-o-y fall in OPM to 3.7%. As expected, Balkrishna the auto universe (ex-TAMO) posted a loss during the quarter. Leading 1,335 Positive 1,511 Industries OEM’s like Maruti Suzuki, Ashok Leyland and TVS Motors reported Exide loss, while auto-ancillary players such as Apollo Tyres posted losses. 166 Positive 194 Industries Outlook: Sundram 435 Positive 562 Fasteners Automotive sales turn flat to positive in August 2020; festive forecast Mayur bright: Automotive sales volumes have been improving consistently since 270 Positive 314 Uniquoters the government opened up the economy from May 2020. Sales have Bosch 12,410 Positive 15,913 been improving month on month and most segments (except commercial vehicles) reported flat to positive growth in August 2020. August 2020 Amara Raja 735 Positive 862 Batteries would be the fourth consecutive month of improvement in demand with management commentaries indicating that the improvement has been Lumax Auto 97 Positive 120 Technologies better than expected. This indicates demand being real and not just pent- Suprajit up demand. Automotive OEMs have indicated that outlook for festive 173 Positive 232 Engineering season is good and with companies building up channel inventory, we Alicon expect the growth momentum to sustain. Castalloy 352 Positive UR Limited Sector view: Volume growth to sustain; automotive industry in Schaeffler India 3,924 Positive 4,500 upcycle; retain positive view: We expect automotive volumes (excluding UR - Under Review commercial vehicles) to sustain growth momentum witnessed in August 2020. After 7-8 quarters of a downturn (automotive volumes were in negative territory since Q3FY19), the automotive industry has resumed uptrend. We believe the automotive industry is in upcycle with FY22 Price chart expected to witness strong double-digit growth as economic activities

125 normalise. Strong growth in volumes would drive up earnings as well as valuation multiples. We retain Positive view on the sector. 100 Key risks: 1) Prolonged COVID-19 infections in India; and 2) Delayed 75 recovery in economic growth and consumer sentiments. 50 19 19 20 19 20 19 20 20 ------Preferred picks: Hero Motocorp, Bajaj Auto and TVS Motors in OEM Jun Jun Oct Apr Feb Dec Aug Aug space. Balkrishna Industries, Mayur Uniquoters, Bosch, Sundram Nifty Nifty Auto Fasteners, Schaeffler India in the auto ancillary space. Leaders in Q1FY2021: Balkrishna Industries, Bajaj Auto Laggards in Q1FY2021: Ashok Leyland, Maruti Suzuki and TVS Motors

September 01, 2020 15 Sector Update

Q1FY2021 result snapshot Sales (Rs cr) EBIDTA margins (%) PAT (Rs cr) Particulars Q1 Q1 YoY QoQ Q1 Q1 YoY bps QoQ Q1 Q1 YoY QoQ FY21 FY20 % % FY21 FY20 bps FY21 FY20 % % Coverage Maruti Suzuki 4,106.5 19,719.8 -79.2 -77.4 -21.0 10.4 -3,141.0 -2,952.3 -249.4 1,435.5 NA NA Hero Motocorp 2,971.5 8,030.3 -63.0 -52.4 3.6 14.4 -1,078.4 -694.2 61.3 762.5 -92.0 -90.1 Bajaj Auto 3,079.2 7,755.8 -60.3 -54.8 13.3 15.4 -218.2 -511.3 528.0 1,125.7 -53.1 -59.7 TVS Motors 1,431.7 4,468.6 -68.0 -59.1 -3.4 8.0 -1,137.2 -1,102.7 -139.1 142.3 NA NA M&M # 5,589.4 12,805.5 -56.4 -37.9 10.3 14.0 -375 -337.7 38.9 892.7 -95.6 -87.9 Ashok Leyland 650.9 5,683.9 -88.5 -83.0 -51.2 9.4 NA NA -387.1 250.3 NA NA Apollo Tyres @ 2,873.4 4,331.3 -33.7 -20.4 8.3 11.0 -270.7 -490.1 -134.6 141.6 NA NA Greaves Cotton 147.1 476.8 -69.2 -59.1 -14.7 12.8 -2,757.2 -2,322.3 -24.2 38.2 NA NA Soft Coverage: Tata Motors @ 31,983.1 61,467.0 -48.0 -48.8 2.0 4.9 -288.6 -181.1 -8,441.2 -3,589.5 NA NA @ 785.5 2,381.9 -67.0 -64.4 3.8 25.8 -2,197.5 -1,575.0 -75.5 451.8 NA NA 1,547.6 2,779.3 -44.3 -24.7 9.6 14.7 -507.7 -355.7 44.0 224.3 -80.4 -73.8 Sundram Fasteners 276.7 945.4 -70.7 -61.5 1.9 18.6 -1,665.9 -1,443.6 -23.5 93.1 -125.2 -140.4 Lumax Auto 71.0 287.5 -75.3 -74.0 -17.6 8.7 -2,624.5 -2,291.6 -14.9 11.3 NA NA Technologies @ Mayur Uniquoters@ 38.9 127.4 -69.4 -70.3 -3.6 13.7 -1,728.6 -2,846.6 0.1 9.7 -99.0 -99.6 Alicon Castalloy @ 53.0 266.4 -80.1 -73.2 -45.5 10.2 -5,568.0 -5,165.0 -44.0 5.1 NA NA Balkrishna Industries 941.7 1,217.5 -22.7 -32.2 25.9 24.0 189.6 -325.2 121.8 176.0 -30.8 -52.7 Amara Raja Batteries 1,151.0 1,815.0 -36.6 -27.2 13.2 15.4 -214.1 -213.5 62.7 140.9 -55.5 -54.1 Bosch 991.5 2,755.4 -64.0 -55.7 -10.3 17.6 -2,792.6 -2,559.5 -121.5 280.0 -143.4 -250.1 Auto Universe 58,690.0 1,37,314.7 -57.3 -53.0 1.9 9.4 -749.4 -598.3 -8,798.1 2,591.4 NA NA Auto universe (ex 26,706.9 75,847.7 -64.8 -57.2 1.9 13.1 -1,124.8 -1,017.4 -356.9 6,180.9 NA NA TAMO) Source: Company; Sharekhan Research # MM+MVML ; @ Consolidated;

September 01, 2020 16 Sector Update

Valuations EPS (Rs) P/E (X) Companies CMP Reco PT (Rs) FY20 FY21E FY22E FY20 FY21E FY22E Coverage Maruti Suzuki 6,912 Buy 6,925 187.1 166.3 256.4 36.9 41.6 27.0 Bajaj Auto 2,959 Buy 3,500 176.3 149.7 187.1 16.8 19.8 15.8 TVS Motors $ 442 Buy 470 13.1 9.8 17.8 29.9 40.0 22.0 Hero Motocorp 2,995 Buy 3,300 159.2 133.1 183.9 18.8 22.5 16.3 M&M @ $ 609 Buy 750 28.6 28.0 37.7 14.7 15.0 11.1 Ashok Leyland 69 Buy 72 1.3 0.1 2.4 53.1 - 28.8 Apollo Tyres # 123 Buy 135 7.7 10.2 13.5 16.0 12.1 9.1 Greaves Cotton 80 Hold 95 5.4 4.1 5.6 14.8 19.5 14.3 Soft Coverage: Balkrishna Industries 1,335 Positive 1,511 48.9 50.1 66.1 27.3 26.6 20.2 Exide Industries $ 166 Positive 194 10.0 7.8 9.9 13.2 16.9 13.3 Sundram Fasteners # 435 Positive 562 15.5 9.6 17.0 28.1 45.3 25.6 Mayur Uniquoters 270 Positive 314 17.6 12.5 21.0 15.3 21.6 12.9 Bosch 12,410 Positive 15,913 441.3 317.0 496.8 28.1 39.1 25.0 Amara Raja Batteries 735 Positive 862 38.7 36.2 42.1 19.0 20.3 17.5 Lumax Auto 97 Positive 120 7.3 3.3 8.0 13.3 29.4 12.1 Technologies# Suprajit Engineering # 173 Positive 232 7.4 6.4 9.8 23.4 27.0 17.7 Alicon Castalloy 352 Positive UR 12.7 -1.7 23.2 27.7 NA 15.2 Limited # Schaeffler India 3,924 Positive 4,500 117.6 87.2 123.5 33.4 45.0 31.8 Source: Company; Sharekhan Research @-MM & MVML; #- Consolidated; $ core business valuation

September 01, 2020 17 Sector Update

Revision in earnings estimates Current Previous Target Company Name Change in Estimate Reasoning Reco Reco Price Maruti Suzuki Upwards Going ahead, the company is witnessing strong Buy Hold 6,925 pick-up in demand with retail sales reaching 85- 90% of Pre-COVID levels. Moreover, demand shift towards entry level cars is likely to benefit Maruti which has stronghold in the segment. We have raised our earnings estimates to factor in demand recovery and also raised our target multiple from 25x to 27x. given the early recovery scenario. We upgrade our recommendation on Maruti Suzuki to “Buy” from “Hold”. Hero Motocorp Fine-tuned Hero MotoCorp (Hero) posted better-than- Buy Buy 3,300 expected Q1FY2021 results. Hero is witnessing consistent improvement in demand on m-o-m basis since the lockdown restrictions were relaxed. Hero has already reached 95% of Pre- COVID sales in July 2020 and the trend has sustained in early August as well. We have fine- tuned our earnings estimates for both FY2021 and FY2022. Bajaj Auto Fine-tuned Bajaj’s operating results were ahead of our as Buy Buy 3,500 well as street estimates as better product mix, favourable currency realisations, and cost- control measures led to better-than-anticipated margins. Bajaj is witnessing fast recovery in both the domestic (due to strong rural sentiments) as well as overseas markets (due to opening of economies and bounce back in crude oil prices). We have fine-tuned our earnings estimates. TVS Motors Maintained TVS Motors (TVSM) Q1FY21 operating results Buy Buy 470 were lower than estimates as negative operating leverage due to steep fall in volumes impacted the margins. However, tax credit during the quarter led to lower than expected loss during the quarter. TVSM is witnessing faster recovery in both the domestic and export markets. TVSM expects to reach pre-COVID sales in both domestic and export markets by September 2020. We have broadly retained our earnings estimates for both FY21 and FY22. M&M Fine-tuned Mahindra & Mahindra (MM+MVML) Q1FY21 Buy Buy 750 results were below our as well as street estimates due to lower than anticipated margin performance in automotive segment. The tractor segment’s margins surprised positively with y-o-y improvement. M&M’s tractor division is witnessing strong demand pull, while automotive volumes are picking up, driven by strong rural sentiments. We have fine-tuned our earnings estimates for FY2021 and FY2022.

September 01, 2020 18 Sector Update

Revision in earnings estimates Current Previous Target Company Name Change in Estimate Reasoning Reco Reco Price Ashok Leyland Upwards With the government opening up the economy Hold Buy 72 under the Unlock measures, demand scenario is improving and the company expects a pick-up month-on-month. Export markets are also opening up and the company aims to enter new markets. We expect MHCV industry upcycle to resume in FY22 driven by normalisation of economic activity and pent-up demand considering two consecutive years of downturn in FY20 and FY21. Moreover, cost control measures would help ALL emerge stronger as the upcycle resumes. We have raised our FY21 and FY22 EBIDTA estimates by 6% each. We upgrade our recommendation to “Buy” from “Hold” earlier. Apollo Tyres Downwards Apollo Tyres Limited (ATL) Q1FY21 results were Buy Buy 135 ahead of estimates, mainly driven by better- than-expected revenues. A sharp recovery in replacement demand in both domestic as well as the European businesses helped revenue exceed estimates. The demand in both domestic and European operations is recovering sharply with the recovery being better than anticipated. In view of recent increase in rubber prices, we have marginally cut our earnings estimates by 6% and 5% for FY21 and FY22, respectively. Greaves Cotton Fine-tuned Greaves Cotton posted higher than expected Hold Hold 95 loss during Q1FY21. Revenue drop of 69% y-o-y was higher than anticipated driven by a lower offtake by OEM due to the lockdown on account of COVID-19. The EBIDTA loss of Rs 22 cr was higher than expectations. Volumes are expected to remain under pressure in the near term due to weakness in the 3W automotive segment on account of COVID-19. We have fine- tuned our earnings estimates for both FY21 and FY22 to factor in Greaves acquisition of Noida based electric three-wheeler company Bestway Agencies Balkrishna Industries Fine tuned Balkrishna Industries’ (BKT’s) Q1FY21 results Positive Positive 1,511 beat estimates on all parameters. BKT is likely to continue outpacing the industry, led by new products and a wider distribution reach. Also, favourable currency movement, captive carbon black sourcing and benign raw material prices are expected to boost margins. We have fine- tuned our earnings estimates for FY22. Alicon Castalloy Maintained Alicon Castalloy Limited’s (Alicon) Q1FY2021 Positive Positive 294 results were lower then estimates. The lockdown on account of COVID-19 led to significant loss of working days with Alicon operating at just a 20% capacity utilisation. The company has retained its FY2021 revenue guidance and is ramping up capacity in view of increased demand. We expect Alicon to outperform the automotive industry, driven by new order wins as well as increased content per vehicle on account of transition to BS- VI emission norms. We have retained our FY2022 estimates for the company.

September 01, 2020 19 Sector Update

Revision in earnings estimates Current Previous Target Company Name Change in Estimate Reasoning Reco Reco Price Exide Industries Fine tuned Exide Industries Ltd delivered better than expected Positive Positive 194 results in a tough environment. Revenues were ahead of estimates driven by a surge in the automotive replacement and Uninterrupted Power Supply (UPS) demand while operating margins beat estimates driven by better mix and cost control measures. Automotive replacement demand is expected to recover fast while demand is gradually picking up in automotive and industrial OEM segment. We have fine-tuned our earnings estimates for both FY21 and FY22 to factor lag in pick up in the OEM demand and increased lead prices in tough demand scenario. Bosch Fine tuned The Q1FY21 operating results of Bosch Limited Positive Positive 15,913 missed our estimates. Lower than expected offtake by OEM customers and negative operating leverage due to a steep fall in the topline. Bosch is witnessing a recovery in automotive demand. Moreover, Bosch is likely to outperform the industry driven by increased content per vehicle with the advent of BS-VI emission norms in India. We have fine-tuned our earnings estimates for both FY21 and FY22. Mayur Uniquoters Maintained Mayur Uniquoters Q1FY21 results were below Positive Positive 227 estimates mainly driven by lower than anticipated topline. MUL has added new customers in the automotive segment in both domestic as well as the export sector. Moreover, its recent foray into the high-realization PU segment for its footwear customers would drive growth. Soft crude prices and better mix are expected to improve margins. We have cut our FY21 estimates by about 10% driven by revenue miss in Q1FY21 and delayed restart of the PU

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