Auto Ancillary

Expect impact of high rubber prices in 4QFY21 – Ceat

Update on the Indian Equity Market:
The Indian markets witnessed a volatile monthly expiry day as Nifty opened the day higher but managed to close 57 points lower at 11,673. Within the index, the gainers were led by ASIANPAINT (3.1%), TECHM (2.2%), and ULTRACEMCO (2.0%) whereas LT (-4.9%), TITAN (-3.4%), and ONGC (-2.9%) were the laggards. Among the sectoral indices, only IT (0.5%) closed the day in green while MEDIA (-1.7%), AUTO (-1.1%), and PHARMA (-0.9%) led the laggards.
Excerpts of an interview with Mr. Anant Goenka, Managing Director, Ceat Ltd (Ceat) published on CNBC-TV18 dated 28th October 2020:
The company is witnessing a very large demand in the months of October and November from the Original Equipment Manufacturers (OEM). The demand seems challenging from 4QFY21E onwards.
Raw material prices are inching up for the past few days. The increased rubber prices will start coming into effect around 4Q onwards. This will have a negative impact on margins.
He said that the rural economy has done well for the company. The farm sector has shown 50-60 percent growth in the replacement segment. The revenues are also back to 90 percent of pre-COVID levels. The higher demand is a mix of pent-up demand and a lot of other aspects.
The higher profitability margins during 1HFY21 were led by favorable mix and t is expected to come down in 2nd half of FY21E.
The company has completed a capex of Rs 2,500-3000mn YTD (Year-to-Date) and the figure will be around Rs 5,000mn by the end of FY21E and Rs 6,000 mn for FY22E.
Ban on Chinese tyres has impacted the PCR replacement demand. However, he said that OEMs are allowed to import Chinese tyres.
Consensus Estimate: (Source: market screener website)
The closing price of Ceat was ₹ 1,123/- as of 29-Oct-2020. It traded at 22x/ 16x/ 14x the consensus EPS estimate of ₹ 51/ 72/ 78 for FY21E/ FY22E/ FY23E respectively.
The consensus target price of ₹ 1,014/- implies a P/E multiple of 13x on FY23E EPS of ₹ 78/-.
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.”

Auto component makers see MoM improvement in demand

Update on the Indian Equity Market:
On Friday, Nifty ended 0.7% higher at 11,762. The top gainers for Nifty 50 were JSW Steel (+6.7%), Tata Steel (+5.4%), and BPCL (+4.4%) while the losing stocks for the day UPL (-7.7%), HCL Tech (-3.5%), and M&M (-1.8%). Top gaining sectors were Metal (+4.0%), Realty (+2.6%) and Pvt Bank (+2.1%) while losing sectors were IT (-0.1%) and Media (-0.4%).

Edited excerpts of an interview with Mr Sunil Bohra, ED & Group CFO, Minda Industries, and Mr Jayant Davar, Co-Chairman and Managing Director, Sandhar Technologies; dated 15th October 2020 from Economic Times:

According to Mr Bohra, the auto component industry has been witnessing a month-on-month improvement in demand, and going forward, the sustenance of the demand hinges on how the scenario plays out during and after the festive season.

Mr Bohra added that October 2020 auto volumes are expected to be better than September 2020. OEMs are positive on medium-term demand forecasts. Personal mobility is driving the auto demand in the last few months.
Mr Bohra said that it is difficult to predict how demand would play out over the next two to three quarters.

Mr Davar, on the other hand, gave an optimistic commentary, stating that he is confident of a sustained recovery in demand. According to him, the demand will stay for a longer time. There is a sense of apprehension but all the indicators point towards a sustained recovery.

According to Mr Davar, October 2020 could potentially be a historic month of the industry. Although at the same time, he did admit that it will take some time for Covid-led damage during 1Q to be wiped out. FY22E will see an improvement in margins for the industry considering the market sustains and the demand sees a rise.

Mr Bohra commented that the cash position of the auto ancillary players is stable. There is no cash crunch witnessed. Minda Industries is in a very comfortable position in terms of the balance sheet.

Mr Bohra and Mr Davar offered slightly differing stances on how the demand trajectory could shape up in the future, both seemed to share a similar view on the localisation of components. The companies have been focusing on and investing in localisation of products for 3 decades. Companies are working on reducing the dependence on China for different parts/ materials. The Companies are trying to diversify their supply chain geographically and be prepared for the worst going ahead.

When asked about the government’s push on AtmaNirbhar Bharat and sourcing locally, the management of Minda, as well as Sandhar, welcomed the step, lauding the coming together of OEMs, suppliers and policymakers for the first time.
Mr Bohra also reiterated that the component maker has been consistently working towards increasing localisation and they are on a constant lookout for alternate (local) sourcing strategies, with strong support from the OEM clients as an added boost.

Mr Davar also brought to light the limitations of the industry in terms of the economies of scale and the fact that substitution of import would require the entire system to pay more.

Consensus Estimate: (Source: market screener website)
The closing price of Minda Industries Ltd was ₹ 327/- as of 16-October-2020. It traded at 97.6x/ 29.7x/20.2x the consensus EPS estimate of ₹ 3.4/11.0/16.2 for FY21E/ FY22E/ FY23E respectively. The consensus target price of ₹ 361/- implies a PE multiple of 22.3x on FY23E EPS of ₹ 16.2/-.

The closing price of Sandhar Technologies Ltd was ₹ 240/- as of 16-October-2020. It traded at 47.1x/22.4x/16.1x the consensus EPS estimate of ₹ 5.1/10.7/14.9 for FY21E/ FY22E/ FY23E respectively. The consensus target price of ₹ 279.5/- implies a PE multiple of 18.7x on FY23E EPS of ₹ 14.9/-.

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.”

Replacement Market has played well- CEAT

Update on the Indian Equity Market:
On Wednesday Nifty closed 0.3% higher at 11,917. Among the sectoral indices, Fin Services (+2.0%), Bank (+1.6%), and Private Bank (+1.5%) closed higher. IT (-1.3%), Pharma (-0.7%), and Auto (-0.3%) closed lower. Wipro (-7.1%), NTPC (-4.1%), and ONGC (-3.1%) closed on a negative note. Bajaj Finserv (+4.1%), SBILIFE (+3.4%), and Bajaj Finance (+2.8%) were among the top gainers.

Excerpts from an interview of Mr. Anant Goenka, MD & CEO, CEAT Ltd with ET NOW dated 12th October 2020:

● The demand for tyres has picked up faster than expectations.
● They operate in 3 markets- Replacement, Auto players, and Export.
● The replacement market has played very well and it leads the way, OEM’s has recently seen a pick up from August and September and reached pre-covid levels. The Export segment has also seen gradual growth.
● Amongst vehicle categories, the two-wheeler and tractor industry is showing the strongest demand followed by the passenger car segment.
● The Commercial Vehicle OEM segment has yet to show growth. The demand is slow over there.
● The rural sector has also shown a very strong demand for the company.
● The company is very well positioned at this point in time and had set up a fair amount of capacity.
● The company’s capacity is well utilized.
● The company had set a new facility in Nagpur for 2 Wheelers and the PV car facility in Chennai, and Truck facility in Halol is now ramping up. The company has invested around Rs 3,000 crore.
● The last six months were about managing supplies.
● Things are much clear for the company up to December, January onwards will have to see how things will pan out.
● The company is planning to reduce its cost by Rs 1000 mn.
● Speaking on the manufacturing front, he said India is in a strong position in the Auto Space. Within Type space, the industry is capable of manufacturing all kinds of tyres.
● On Export opportunities, he said the market has shown a linear growth. It is one big area where the Industry can take advantage of the current situation.
● The company is planning to de-risk the exposure towards China by focusing to have at least one domestic supplier for key raw materials.
Consensus Estimate: (Source: market screener and Investing.com websites)
● The closing price of CEAT was ₹ 1,004/- as of 14-October-2020. It traded at 22x/ 15x/ 13x the consensus Earnings per share estimate of ₹ 46.6/65.5/79.0 for FY21E/ FY22E/ FY23E respectively.
● The consensus average target price for CEAT is ₹ 967/- which implies a PE multiple of 12x on FY23E EPS of ₹79.0/-.
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.”

Focus on vertical strengthening of product portfolio, market momentum expected in Q4: Sunil Bothra, Minda Industries

Update on the Indian Equity Market:

On Thursday, Nifty closed 0.7% lower at 12,126. Among the stocks, ONGC(+2.5%), Vedanta (+1.9%) and JSW Steel (+1.0%) were the gainers. Yes Bank (-4.4%), Bharti Airtel (-2.0%), and Reliance (-1.9%) ended in the red. Nifty Media (+0.1%) and Nifty Metal (+0.6%) were the only sectors which ended in the positive. Nifty PSU Bank (-1.5%), Nifty Pharma (-0.9%) and Nifty Bank (-0.9%) were the worst-performing sectors.

Focus on vertical strengthening of product portfolio, market momentum expected in Q4: Sunil Bothra, Minda Industries

Excerpts from an interview with Mr Sunil Bothra, Executive Director and Group Chief Financial Officer, Minda Industries:

  • The existing sensor business is more than 5 years old and as part of their strategy, they are in a long-term partnership with Sensata Technologies.
  • Sensata, which was previously Texas Instruments have many businesses which are into defence and other technologies.
  • Minda Industries has entered into an agreement with Sensata to acquire the wheel speed sensor business. The agreement will help to acquire the customer base in India and South Korea and will also make global opportunities available.
  • Although the acquisition cost only ₹ 45 crore, it is expected to generate an additional revenue of ₹100-120 crore in the next four years. With this acquisition, the fresh investment in the sensor business will reach ₹ 145 crore and it is expected to generate revenue of ₹ 500-600 crore in the next 4-5 years.
  • The company has been focussing on vertically strengthening the product portfolio, which they have done by undertaking small acquisitions. Now that they have more than 30 businesses or products, the focus is on strengthening their technological capability and offering to the OEs.
  • The recently concluded acquisition of Delvis will help strengthen their technology position in 4-wheeler lamps, thereby strengthening the sensor business.
  • Talking about the demand, he said the company has seen some green shoots in October, which led to a little increase in volume in a few original equipment manufacturers in November.
  • Since December is generally a lean period, Q3 is not very bullish as compared to Q2.
  • Some market momentum is expected in Q4. But they will have to wait and see how the market pans out post the BS-VI launch from April 1, since there will be price impact of 10-12%.
  • If they are able to increase their kit value per car or 2-wheeler or OE in Q4, they are hopeful of continuing the overperformance in the near future.      

Consensus Estimate: (Source: market screener website)

  • The closing price of Minda Industries was ₹ 348 /- as of 26-December-19. It traded at 32.8 x/ 23.4x / 18.5x the consensus EPS estimate for FY20E/ FY21E/ FY22E of ₹ 10.6/14.9 /18.8 respectively.
  • Consensus target price of ₹ 383/- implies a PE multiple of 20.4x on FY22E EPS of ₹ 18.8/-.