Tag - commercial vehicles

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 30th 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 31st 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/-

Tata Motors shifts focus to cars on weak demand for CVs

Update on the Indian Equity Market:

On Friday, NIFTY closed at 12,257 (+0.3% higher than the previous close). Among the stocks, Coal India (+3.3%), Infosys (+1.7%) and Ultratech Cement (+1.6%) were the gainers. Yes Bank (-5.0%), Zee Entertainment (-3.5%), and Indusind Bank (-1.2%) were the top losing stocks. Nifty Realty (+1.8%), Nifty Metal (+1.2%) and Nifty Auto (+0.8%) were the top sectoral gainers while Nifty Pvt Bank (-0.1%) was the only sectoral loser.

Excerpts from an interview with Mr Guenter Butschek, MD & CEO, Tata Motors Ltd published in Livemint on 10th January 2020:

  • Tata Motors Ltd (TML) is betting big on passenger vehicles (PVs) to lead its turnaround plans as it transitions to Bharat Stage-VI emission norms. The move to BS-VI will give the company ‘a much more powerful play’ in the domestic market during the next fiscal.
  • With the new range of products, including upgrades for BS-VI, Mr Butschek is confident that March 2020 would be the turning point. If this gets support from the tailwinds, TML will get back to the previous growth path.
  • Referring to TML’s new product pipeline, including the company’s ambitious electric vehicle plans, Mr Butschek said the company plans to unveil 26 products at next month’s Delhi Auto Expo in February, including the 14 new commercial and 12 new passenger vehicles. This would be the biggest display of new vehicles. TML also plan global unveils of four new vehicles.
  • Mr Butschek termed the transition to BS-VI as ‘the single biggest engineering and investment effort ever’ put in by TML. He said a team of 3,500 engineers worked on BS-VI projects, upgrading over 20 engine platforms, 100 lead vehicle models and 1,000 variants. TML invested more than ₹ 1,200 crore in FY19 and hired 500 additional engineers for the process.
  • According to him, TML’s turnaround story in PVs and CVs is inspiring in terms of cost reduction. The Company has been able to reduce their breakeven point during tough times which is clear proof that they have done their homework. They are done with their investments and now they need is the volumes.
  • One key step was to bring down product development costs in its common vehicle architecture, which would form the base for several upcoming models.
  • In PVs, it has developed flexible vehicle platforms, code-named Alpha and Omega, which would power up to 12-14 new nameplates in the near- to mid-term. The new premium hatchback Altroz is going to be the first model from its Alpha architecture. The two modular platforms will also power the range of electric cars planned by the Company.
  • Mr Butschek said that TML would remain cautiously optimistic while estimating that the market would recover by 2HFY21, once the BS-VI transition is behind.
  • TML is seeing marginal improvement in retails. While the market sales volumes were flat YoY in December, TML’s sees improvement in its performance comparing the previous months.
  • For CVs, revenue from which was over four times the revenue of PVs, Mr Butschek said absorption of excess freight-carrying capacity could take up to five years, thereby hampering demand from the truck fleet owners across the country. Introduced in July-August 2018, the new axle load norms raised the permissible gross vehicle weight (GVW) of over 16-ton heavy trucks by about 12-25%, thereby creating excess carrying capacity for fleet operators.
  • A good vehicle scrappage policy could help reviving the demand for CVs in the near term, said Butschek.

Consensus Estimate: (Source: market screener website)

  • The closing price of Tata Motors was ₹ 196/- as on 10-January-20. It traded at 25x/ 12x/ 8x the consensus EPS of ₹ 7.5 / 15.6 / 22.9 for FY20E/ FY21E/ FY22E respectively.
  • Consensus target price is ₹ 187.5/- which implies a PE multiple of 8x on FY22E EPS of ₹ 23/-

“The worst is behind us” says Ashok Leyland Chairman.

Update on the Indian Equity Market:

On Tuesday, NIFTY closed 0.2% lower. Bajaj Finance (+3.3%), Bharti Infratel (+3.3%) and Yes Bank (+3.2%) were the top NIFTY50 gainers. Zee (-3.7%), Indusind Bank (-2.3%) and Ultratech Cement (-2.2%) were the top NIFTY50 losers. Among the sectors, NIFTY FMCG (+0.3%) was the only sectoral index that closed positive. NIFTY MEDIA (-1.4%), NIFTY PHARMA (-1.1%), NIFTY METAL (-0.9%) were the worst-performing sectors.

 “The worst is behind us” says Ashok Leyland Chairman.

Excerpts from an interview with Mr. Dheeraj Hinduja, Chairman, Ashok Leyland broadcasted on CNBC on 5th November 2019.

  • Demand slowdown has been caused by multiple issues including issues faced by financing companies and the availability of liquidity in the market.
  • Last financial quarter is traditionally a strong quarter for Commercial Vehicle (CV) OEMs. 4QFY20 will be a strong quarter followed by a slow 1QFY21 due to the technology transition from BS-IV to BS-VI.
  • Management is looking forward to FY21. Historically, the year of transition is a strong year.
  • The transition from BS-IV directly to BS-VI in a 3 year period is one of the shortest transition times globally. Other countries have taken 7-10 years in which period the cost absorption has been done in a phased manner. There will be a significant cost-push on account of the transition.
  • Even post the cost-push due to BS-VI, management says Ashok Leyland will be cost-competitive as ever. The customers will see real value in products launched.
  • Looking forward, there are some good signs such as many initiatives that the government is taking and the revival of financing. Most of the OEMs have now corrected the state of their inventories that had built up. The next few months look to be quite positive.
  • The market is not going to recover overnight, but the worst is behind for Ashok Leyland.
  •  It’s been a year since the previous CEO, Mr. Vinod Dasari quit.  Search for the CEO is on. FY20 is a year of important changes with respect to BS-VI, their new modular platform and the introduction of a whole line up of LCV products. The Board had taken a decision that they did not want a major disruption in the Management at this important juncture.  But a new CEO is required and the Board will be announcing a successor in the next few months.