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 30^th 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 31^st 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/-