Auto

Exports will be the focus area after the acquisition – Motherson sumi

Update on the Indian Equity Market:

On Tuesday , NIFTY ended higher at 17,991 (+0.26%). All the sectoral indices were gainers, led by PSU Banks (+3.1%), Media (+1.5%), and FMCG (+1.2%). IT was the lone loser, down by (-0.9%). Among the stocks, Titan (+6.1%), Bajaj Auto (+3.3%), and Bajaj Finserv (+3.0%) led the gainers while HCL Tech (-3.7%), HDFC Life (-1.9%), and Coal India (-1.7%) led the losers.

Excerpts of an interview with Mr. Vivek Chaand Sehgal, Chairman , of Motherson Sumi (MS) with ET NOW on 11th October 2021:

  • Acquisition of CIM Tools in aerospace segment will be beneficial for MS. CIM Tools have an order book of more than $200 million and the company will do very well in coming time.
  • Exports will be the focus area because MS set up bases in the different countries with CIM Tools and there will be a rise in exports because of the customers are abroad.
  • CIM Tools is a profit-making company and idea would be to improve it and add to the top line. MS has a clear thinking. They get 40% return on capital employed.
  • MS is acquiring existing profit-making joint venture in China. It is very important because MS is more into in passenger vehicles and this one is all about commercial vehicles .
  • MS has a huge presence in China and company have a huge market that they can then generate in China itself.
  • Opportunity wise in two to three years company will be all over in China. Company is learning about commercial vehicles. It is a wonderful area to get into it because MS is very strong with commercial vehicles globally.
  • Comparing global and domestic business is very difficult. The kinds of cars that are produced outside and the cars in India are very different in terms of value. Every car that produced there has a buyer for it. That means customers are at very good situation. Companies have the orders but they have some supply constraints.
  • The chip shortage and all other things combated with customers in a very strong way. The demand is huge and the situation is also getting better.

Asset Multiplier Comments

  • Auto production cuts and raw material price increase due to inflation might affect company’s performance in the near term.
  • Company is expanding its business in different segments. This will be the growth driver.

 Consensus Estimate: (Source: market screener website)

  • The closing price of Motherson Sumi Systems Limited was ₹ 245/- as of 12-Oct-2021. It traded at 35x/23x/20x the consensus earnings per share estimate of ₹6.89/10.8/12.4 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 254/- implies a PE multiple of 20x on FY24E EPS of ₹12.4/-.

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.”

 

 

Mid-market segment to lead growth in festive season – Bajaj Auto

Update on the Indian Equity Market:

On Monday, NIFTY ended higher at 17,691 (+0.9%) as it closed near the intraday high level of 17,751. All the sectoral indices were gainers, led by METAL (+3%), MEDIA (+2.6%), and REALTY (+2.2%). Among the stocks, DIVISLAB (+7.8%), HINDALCO (+4.6%), and NTPC (+4%) led the gainers while CIPLA (-3%), GRASIM (-2.3%), and UPL (-1.4%) led the losers.

Excerpts of an interview with Rakesh Sharma, Executive Director, of Bajaj Auto (BAJAJ-AUTO) with CNBC TV18 on 1st October 2021:

  • Chip shortage is affecting the manufacturing of high-end bikes and their customers around the world are disappointed. The company is able to meet only 65% of the requirements.
  • On the export side, the company is very comfortable despite the container and chip shortage and it will do much more in October ‘21 compared to September ’21. The demand is returning well in markets like Latin America, Africa, South Asia. The company expects sales volumes through exports to remain over 200,000 vehicle per month.
  • Migration from internal combustion engine (ICE) vehicle to electric is going to continue. The company cannot determine the pace of this change as it is primarily driven by factors like overall costs coming down for customers, reassurance regarding charging infrastructure. In this phase, the company is pre-occupied with building capabilities.
  • The company’s retail outlook in the festive period is positive. The indicators like rural demand pickup, behaviour of retail finance, shaping up of enquiries, excitement at dealership level suggest a single digit to low-double digit growth during the festive season. It expects the mid-market segment to lead growth during the festive season.
  • The company plans to occupy and retain a premium position in 2-wheeler electric vehicles (EVs). It is offering the most highly priced vehicle in this segment with self-proclaimed value additions in terms of very good design, best performance, an all-steel body, and a very good customer care.

Asset Multiplier Comments

  • Bajaj Auto is planning to set up a separate subsidiary for EV. It already sells Chetak scooter and is planning to launch 3-wheeler EVs in FY22. This will help the company to build the required capabilities and cater to growth in the EV business.
  • The domestic volume figures will improve from 3QFY22 as the company plans to aggressively launch products in 125cc segment, and provide innovative offerings in the entry motorcycle segment.

Consensus Estimate: (Source: market screener website)

  • The closing price of BAJAJ-AUTO was ₹ 3823/- as on 04-Oct-2021. It traded at 21x/17x/15x the consensus earnings per Share estimate of ₹ 186/221/248 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 4232/- implies a PE multiple of 17x on FY24E EPS of ₹ 248/-.

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.”

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.”

Expect a substantial price hike due to spike in input costs – Maruti Suzuki

Update on Indian Equity Market:

On Thursday, NIFTY ended at 17,234 (+0.9%) as it closed near its high at 17,243. Among the sectoral indices, OIL & GAS (+0.8%), CONSUMER DURABLES (+0.6%), and FMCG (+0.6%) ended higher, whereas PSU BANK (-0.5%) and AUTO (-0.2%) ended lower. Among the stocks SHREECEM (+6.0%), HDFCLIFE (+5.8%), and CIPLA (+3.5%) led the gainers while M&M (-1.9%), ONGC (-0.9%), and BAJAJ-AUTO (-0.9%) led the losers.

Excerpts of an interview with Mr. Shashank Shrivastava, Executive Director of Maruti Suzuki (MARUTI) with CNBC TV18 on 31st August 2021:

  • MARUTI is looking to cut production in September due to a shortage of semiconductors. The auto manufacturer is also getting ready for a substantial price hike in the upcoming month and this will be the fourth one since January due to a sharp rise in commodity costs.
  • Commodity prices started going up from April-20 and they impacted MARUTI’s material cost, which is 75 percent of the total cost of manufacturing. The increase in prices of commodities like steel and copper was close to 50% and precious metals like Rhodium had a price hike of 257%.
  • Since they were already coming out of a bad year (FY20) which was 18% less than FY19 and Covid-19 had badly affected 1QFY21, they did not wish to compromise demand and hence there was no price hike.
  • However, they did increase prices in January by 1.4% in the hopes of some softening in commodity prices which did not pan out as expected. This made them deploy an additional price hike of 3.4% in April and another hike of 0.3% in CNG vehicles in August.
  • Shrivastava confirmed that the upcoming price rise would be substantial and it would be deployed across all models produced by MARUTI.
  • He did not reveal any production numbers for September since that depends on how the shortage situation pans out for their semi-conductor vendors.
  • The number of electronic components varies from product to product and model to model within MARUTI’s large portfolio and for the past few months, they have been trying to adjust production to maintain high levels of production.

 

Asset Multiplier Comments

  • Semiconductors are silicon chips that cater to control and memory functions. The shortage of such a crucial component has been impacting the automotive industry globally along with other industries, forcing them to cut down on production.
  • MARUTI reported a decline of 20% in sales in August, as compared to July 2021.
  • Owing to a supply constraint of electronic components due to the semiconductor shortage situation, MARUTI expects a decline of 60% in vehicle production in the month of September in Haryana and Gujarat. As certain fixed costs are to be incurred, margins could be affected in the short term.
  • With the festivities coming up, there could be a rise in demand for vehicles and how MARUTI is able to match this festive buying with its supply remains to be seen.
  • MARUTI is in no rush to join the electric vehicle bandwagon until they make it feasible for customers in terms of affordability.

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

  • The closing price of MARUTI was ₹ 6,780/- as of 02-Sept-2021. It traded at 40x/27x/21x the consensus EPS estimate of ₹ 188/280/354 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 7,560/- implies a PE multiple of 21x on FY24E EPS of ₹354/-

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.”

No Plans to enter EV Segment in the short term: Maruti Suzuki

 

Update on Indian Equity Market:

On Wednesday, markets ended flat with Nifty closing 10 points lower to close at 16,634.  EICHERMOT (3.7%), HDFCLIFE (2.6%), HINDALCO (2.4%) were the top gainers on the index while BAJAJFINSV(-2.9%), TITAN (-2.2%) and MARUTI (-1.3%) were the top losers for the day. Among the sectoral indices,  OIL & GAS (1.1%), IT (0.7%) and FMCG (06%) were the top gainers, while PRIVATE BANK (-0.9%), METAL (-0.8%) and REALTY(-0.8%) were the top losers.

 

Excerpts of the Address by RC Bhargava, Chairman, Maruti Suzuki at 40th AGM dated 24th August 2021:

 

  • The Company will not enter electric vehicles in the short term and will enter “only when it is feasible” to sell reasonable numbers. The sales volume of existing EV (Electric Vehicle) Players is not significant enough to threaten Maruti’s Market Share.
  • The company is a market leader in ICE (Internal Combustion Engine). It has plans to be a market leader in EVs as well but the company feels, the conditions for EV penetration in India are not adequate yet.
  • The company’s short term focus is on Hybrid CNG to manage the headwinds raised by rising fuel prices until EVs reach their inflexion point.
  • The company plans to launch an SUV in this high growth segment with the aim to capture more market share in this highly competitive field consisting of a lot of players.
  •  The company is currently facing production issues due to semiconductor shortages. This is expected to continue till the end of FY22. There’s a significant reduction in production, however, no major operational loss is evident.  
  • The Company’s planned Capex is Rs. 45 bn but the company expects there will be a significant deviation in actuals by the end of the year.
  • There’s very low penetration per capita when it comes to the passenger vehicles segment. He feels that in order for India to be fully developed, India should not be pressured to meet its carbon emission reduction norms.

 

Asset Multiplier Comments:

 

  • Maruti Suzuki has a great brand presence across all segments in the Indian markets. With its cautious stance on EV, it risks losing out on market share to more aggressive EV players like Tata Motors.
  • ICE Vehicles are not still being phased out at a very rapid pace and a complete transition to EV is still a long way off. Till then Maruti Suzuki will likely continue to enjoy its position as the market leader.

 

Consensus Estimates (Source: market screener website): 

  • The closing price of Maruti Suzuki was ₹6711/- as of 25-August-2021.  It traded at 36x/24x /19x the EPS estimate of ₹189/₹ 279/₹ 351  for FY22E/23E/24E.
  • The consensus price target is ₹ 7912/- which will put it at 23x the EPS estimate for FY24E of ₹ 351/-

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.”

 

2 Wheeler EV Segment at a growth inflexion point: Hero Electric

Update on Indian Equity Market:

On Wednesday, markets ended lower with Nifty closing 46 points to close at 16,569. EICHERMOT (+2.7%), ULTRACEMCO (+2.4%) BAJFINANCE (+2.1%) were the top gainers on the index while KOTAKBANK (-2.3%),HINDALCO (-2.3%) and ICICIBANK (-2.0%) were the top losers for the day. Among the sectoral indices,  FMCG (0.7%), CONSUMER DURABLES (0.6%) and PSU BANK (0.3%) were the top gainers, while PRIVATE BANK (-0.9%), METAL (-0.8%) and REALTY(-0.8%) were the top losers.

Excerpts of an interview with Mr Naveen Munjal, MD, Hero Electric on ET Now dated 17th August 2021:

  • Electric 2 Wheelers are the most lucrative segment in the EV Industry due to a lot of factors such as fewer infrastructure demands, simpler charging requirements, and ride distances.
  • The biggest tailwind for this segment is government support, FAME II ratings, state-specific concessions, and production-linked incentive schemes for EV Manufacturers.
  • The Total Cost of Ownership gap between ICE and EV is increasing daily due to the rise in fuel prices. Hence, the company expects demand to shift to EVs in the upcoming years to the point it’ll be 20% or a 4 billion unit segment in the next 5 years.
  • The consumer sentiment is shifting towards Electric Mobility not just in urban areas. The penetration is increasing in tier-3, tier-4, and some rural areas as well, so the sales would only go northwards from hereon.
  • The range is adequate for regular usage and for heavy usage the company offers multiple batteries as a backup. Most customers charge their bikes at home. However, the range anxiety can be addressed by installing charging stations, in which the company is investing heavily.
  • The company has also trained 6,000 mechanics and plans to train another 25,000 to solve any potential issues that may arise due to EV Malfunctions thereby creating an entire ecosystem.
  • India is leapfrogging technologies to have the most upgraded know-how as compared to other countries who took the traditional approach of innovating through the years, which is why the performance of Indian EV 2 Wheelers is best in class.
  • R&D that is being done is immense. So the vehicles in the future are going to be far better than what they are at this point. This range of vehicles is already better than what was three or five years back. This demonstrates the huge improvement in technology,

Asset Multiplier Comments:

  • Electric Vehicles are a thing of the future due to the headwinds faced by ICE Vehicles, the transition has already begun and India stands to be one of the biggest EV markets in the upcoming decade.
  • There are no pureplay EV Manufacturers that are listed on the bourses. However many 2 Wheeler Manufacturers are planning their foray into this segment. It should be noted that Hero Electric and Hero Motorcorp are two legally distinct entities with no connection to each other.
  • Hero Motorcorp has its own plans to manufacture Electric 2 Wheelers as it wants to expand into this lucrative growth-driven segment.

Consensus Estimates (Source: market screener website): 

  • The closing price of Hero Motorcorp was ₹2763/- as of 18-August-2021.  It traded at 17x/14x /12x the EPS estimate of ₹167/₹ 201/₹ 225 for FY22E/23E/24E.
  • The consensus price target is ₹ 3235/- which trades at 14x the EPS estimate for FY24E of ₹ 225/-.

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.”

Production loss to be minimal despite semi-conductor Shortage: Bharat Forge

 

Update on Indian Equity Market:

On Monday, markets ended higher with Nifty closing 34 points higher to close at 16,130, TATASTEEL(3.7%), BAJFINANCE (3.4%) M&M (2.4%) were the top gainers on the index while MARUTI (-2.6%),SHREECEM (-2.3%) and EICHERMOT (-2.3%) were the top losers for the day. Among the sectoral indices,  METAL  (1.5%), OIL & GAS (0.9%) and  FINANCIAL SERVICES (0.4%) were the top gainers, while MEDIA (-1.4%),  PSU BANK (-1%) and AUTO (-0.9%) were the top losers.

 

Excerpts of an interview with Baba Kalyani, CMD of Bharat Forge on CNBCTV18 dated 13th August 2021:

 

  • Despite mounting input cost inflation, Company managed to expand its margins by 100 bps sequentially and posted robust growth on both Revenue and Net profit Fronts in Q1FY22
  • Semi-Conductor shortage is a universal phenomenon that’s affecting industries and businesses across the world. In the case of OEMs, most of them have taken adequate steps to address this issue. 
  • In the short term, everyone is suffering some loss in production, however, the company expects no adverse impact on production in the medium-long term. The company reiterated that the situation was outside the control of anyone and its a matter of when and not if the issue will be resolved,
  • He stated that the industry has resorted to rationing of semiconductors to produce higher-value products. This will impact the supply in the short term. 
  • A lot of Passenger vehicle manufacturers have resorted to reducing the production of lower end passenger cars against higher value cars that offer better realisations.
  • Cost Reduction was the company’s important priority in the past 2 years and the company has optimised costs through downsizing, IoT and WC Management, to produce the best margins this company has seen.
  • The company has a strong balance sheet and healthy cash balance, the company plans to take forward its growth through inorganic acquisitions aimed at future technologies like e-mobility, renewables etc as the company gears itself for the future.

 

Asset Multiplier Comments:

 

  • The Semi-Conductor shortage will be dealt with sooner rather than later, barring any major disruptions, OEM and the entire Auto and Ancillary sector is recovering well.
  • Bharat Forge has managed to improve its margins and its plans to grow across all segments through strategic investments as it gets ready for the future are on the right track.

 

Consensus Estimates (Source: market screener website): 

  • The closing price of Bharat Forge was ₹803/- as of 16-August-2021.  It traded at 45x/29x /26x the EPS estimate of ₹18/₹ 28/₹ 31 for FY22E/23E/24E.
  • The consensus price target is ₹ 900/- which trades at 30x the EPS estimate for FY24E of ₹ 31/-

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.”

New auto launches doing well – M&M

Update on the Indian Equity Market:

On Tuesday, NIFTY closed 0.1% up at 16,280. Top gainers in NIFTY50 were BHARTIARTL (+3.8%), TECHM (+2.8%), and HDFC (+1.8%). The top losers were SHREECEM (-4.1%), JSWSTEEL (-3.6%), and TATASTEEL (-2.8%). The top gaining sectors were IT (+0.9%), FINANCIAL SERVICES (+0.3%), and HEALTHCARE (+0.2%) while the top sectoral losers were METAL (-2.8%), PSU BANK (-2.6%), and MEDIA (-2.4%).

New auto launches doing well – M&M

Excerpts of an interview with Dr. Anish Shah, MD & CEO of M&M, aired on CNBC-TV18 on 9th August 2021:

  • M&M reported an exceptional loss of Rs 800 mn in 1QFY22. This hit was on account of residual impairment of past investments. Management does not expect such hits going forward.
  • In 1QFY22, M&M’s market share in domestic tractors has gone up by 260 bp to 41.8%. M&M has been ahead of the industry in price hikes, and market share gain has not come at the expense of margins.
  • M&M has already taken 3 price hikes in this year and is not looking at further increases.
  • Demand is picking up but supply chain is facing issues and has not reached normalcy yet.
  • Indian tractor industry registered a strong growth of 27% in FY21. Against that, M&M has guided to tractor industry growth of 3-5% for FY22E. Looking at history, management thinks there could be some demand correction. Not seeing any pressures on demand on ground today, but looking at uncertainties, management is being conservative.
  • On the planned sale of investment in Ssangyong, management said a number of buyers have expressed interest. M&M has taken enough provisions so there is no further hit expected.
  • Restructuring has been completed in terms of categorizing entities in groups. Going ahead, M&M plans to continue the fiscal discipline. If entities in Category A & B don’t adhere to set standards, management will categorize them in Category C.  (Reference: In an effort to improve consolidated performance, M&M had categorized all loss-making international subsidiaries into 3 categories. Category A (had a clear path to profitability), Category B (had a quantifiable strategic impact), and Category C (had an unclear path to profitability that mandated an exit and initiation of an appropriate action plan for the same)).
  • Categories A & B have performed well in 1QFY22 and the turnaround is visible. Category A companies reported a profit of 300 mn in 1QFY22 vs a loss of 1,030 mn in 1QFY21. Category B companies reported a profit of Rs 310 mn in 1QFY22 vs a loss of 170 mn in 1QFY21.
  • M&M’s new products such as Thar, XUV 300, Bolero neo are doing well along with older power brands. M&M is seeing good demand across segments including in pickup trucks.
  • In the EV space, M&M sells the most vehicles in India.
  • EV adoption in 3-wheelers is going well- the 3 important factors of cost parity, range anxiety and charging/ battery swapping infrastructure have been addressed for 3-wheeleres. EV adoption in 4-wheelers will still take some time.
  • M&M is in the process of outlining plans for a 4-wheeler EV platform which will enable them to design high capability 4-wheelers. Battista, which is the electric car being launched by M&M’s subsidiary Pininfarina, has among the best technologies in EV. M&M will look to bring that technology in Indian cars as well.
  • On capacities, M&M has adequate capacities in the automotive segment. Management could look into adding capacities in Tractor segment and has earmarked Rs 30,000 mn over next 3 years for the same. Management has also earmarked Rs 30,000 mn over next 3 years for EV investments.

Asset Multiplier comments:

  • EV is the big trend which will shape the future of auto industry globally. Auto companies across segments have been increasing investments in the EV space. While most players are moving in the right direction, how the competitive landscape shapes up over the next few years is anybody’s guess.
  • Rural India has been impacted due to the 2nd wave of covid-19. Despite the forecast of a normal monsoon for the 3rd straight year, tractor demand could come under pressure considering impact in rural India.

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

 

  • The closing price of M&M was ₹ 786/- as of 10-August-2021.  It traded at 20x/ 17x/ 15x the consensus earnings estimate of ₹ 39.0/ 45.6/ 51.7 for FY22E/23E/24E respectively.
  • The consensus price target is ₹ 948/- which trades at 18x the earnings estimate for FY24E of ₹ 51.7/-

 

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.”

Expect better traction July onwards– Eicher Motors

Update on the Indian Equity Market:

On Tuesday, NIFTY ended marginally lower at 15818 (-0.1%) as it could not sustain the higher level from previous day close. Among the sectoral indices, BANK (+1.0%), FINANCIAL SERVICES (+1.0%), and PRIVATE BANK (+0.9%) ended higher while AUTO (-1.7%), PSU BANK (-1.3%), and IT (-1%) led the losers. Among the stocks, ULTRACEMCO (+3.2%), SHREECEM (+3.0%), and HDFCBANK (+2.4%) led the gainers while TATAMOTORS (-8.5%), TECHM (-2.3%), and COALINDIA (-1.5%) led the losers.

Excerpts of an interview with Mr. Vinod Aggarwal, MD and CEO-VECV of Eicher Motors (EICHERMOT) published with CNBC TV18 on 5th July 2021:

  • CV sales of Eicher Motors in June ’21 were 2,438 units, which were 99% more than the CV sales in May ’21 of 1,223 units. Yet, the sales were much lesser than the average pre-pandemic levels of 5,500 to 6,000 units.
  • The steel prices have fallen by 7% in the 1st week of July and there has been some softening of prices due to an increase in production of steel in China. Yet, Eicher Motors hasn’t experienced any decrease in the raw material prices as there is a lot of pressure from steel mills to increase prices.
  • Though the freight rates have gone up, the prices are required to increase further so as to reduce the pressure on margins caused due to an increase in fuel prices.
  • Speaking on demand, Eicher Motors is facing an issue in South India due to a severe lockdown. East is also not doing so well, but the demand in North and West has returned to normal. As the construction sector is doing well, more demand can be seen coming from the infrastructure/construction trucks.
  • The margin pressure has also been due to an increase in price related to BS-VI norm, steel price, tyre prices. Eicher Motors has better margins in FY21 due to better cost and price management, and it will be required to do the same in FY22 so as maintain or improve margins further.

Asset Multiplier Comments

  • With the prices in steel falling in the 1st week of July, we expect a reduction in the cost of raw materials for the auto manufacturers like Eicher Motors.
  • As the oil prices rise further with the talks of OPEC+ nations being called off, we look forward to oil price related global cues to understand its effect of the auto industry. High petrol prices will likely reduce the demand for 2 wheelers.

Consensus Estimate: (Source: market screener website)

  • The closing price of EICHERMOT was ₹ 2,713/- as on 06-July-2021. It traded at 33x/ 26x the consensus earnings estimate of ₹ 81/105 for FY22E/FY23E respectively.
  • The consensus target price of ₹ 2,702/- implies a PE multiple of 26x on FY23E EPS of ₹ 105/-.

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.”

Rural India outlook positive on good rabi procurement, cash flow – M&M

Update on the Indian Equity Market:

On Monday, NIFTY closed up at 15,834 (+0.7%). Top gainers in NIFTY50 were Hindalco (+3.8%), ONGC (+2.4%), and SBI (+2.2%). The top losers were Tech M (-1.6%), HDFC Life (-1.4%), and BPCL (-0.6%). The top sectoral gainers were REALTY (+2.7%), METAL (+1.2%) and PVT BANK (1.1%) and sectoral losers were IT (-0.2%) and PHARMA (-0.01%).

Excerpts of an interview with Mr. Hemant Sikka, President of Farm Equipment Sector, M&M (M&M) with CNBC-TV18 dated 2nd July 2021

  • In the month of June 21, the total tractor sales went up 32 per cent, exports jumped over 90 per cent and the market share rose to 42.5 per cent. The company is optimistic about tractor demand in the coming months. The farm sector equipment industry has grown by 19 per cent in June and M&M has outperformed showing 32 per cent growth.
  • The rural outlook looks bright as demand has increased in June. Overall, the rabi procurement has gone around very well. Cash flow in the rural heartland is very positive.
  • With the second wave of COVID subsiding, confidence is coming back. It was a play of two factors, clearly, a little bit of pent-up demand and also some fresh demand coming in that is why June has played out so well for the industry overall.
  • They are getting into a very high base in Q2, Q3, and Q4 FY21 so they will wait for July and August, see how the monsoon pans out, and then maybe at the beginning of September, they will be able to revise the guidance.
  • Overall guidance remains the same and they will try to maintain their usual high & healthy margins.
  • In June, pent-up demand was there due to lockdowns in April & May but there was a little bit of fresh demand as well. The tractor industry has been on the roll and if the monsoon progresses well then the industry will be able to perform much better.
  • None of the players has a very high inventory. M&M also has a very reasonable inventory. In fact, they have reduced inventory in Q1, so production will be running at full capacity.
  • Automakers have raised prices in recent times with most citing increased output costs as a reason. M&M plans to gradually do so.
  • They have taken their latest price increase on July 1. They have taken a 3 per cent price increase. Before that on April 1 and January 1, they had taken the previous 2 price increases. Another increase might be there in 2HFY22.
  • Some of the states have come back as far as supply is concerned like Maharashtra, all the suppliers are running at 100% capacity. In Karnataka, Bangalore, suppliers are running at 50-60% capacity.
  • Overall, they are looking at positive sentiment from the Rural side.

Asset Multiplier comments:

  • Due to positive sentiment building up in rural India, we expect the tractor industry to perform very well.
  • Overall waiting time has increased due to semiconductor shortage but there has been a good demand for their newly launched models (XUV, Thar, bolero).

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

  • The closing price of M&M was ₹ 791/- as of 05-July-2021.  It traded at 20x/ 17x the consensus earnings estimate of ₹ 38.8/ 45.5 for FY22E/23E respectively.
  • The consensus price target is ₹ 947/- which trades at 21x the earnings estimate for FY23E of ₹ 45.5/-

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.”