Tag - Auto outlook

Tractor volumes show record growth, Momentum expected to continue: Escorts

Update on Indian Equity Market:

After yesterday’s rout markets traded flat to end the day as Nifty closed the day 45 points lower at 14,683.  Within the index, ADANIPORTS (+12.6%), TATACONSUM (+4.6%), and ASIANPAINT (+4.0%) were few of the gainers while POWERGRID (-2.3%), GRASIM (-1.3%), and EICHERMOT (-1%) led the losers. Among the sectoral indices, PHARMA (+1.8%), METAL (+1.4%), and REALTY (+1.2%)  led the winners while BANK (-0.5%), PRIVATE BANK (-0.4%), and MEDIA (-0.3%)  led the losers. 

Excerpts of Interview with Bharat Madan, Group CFO of Escorts Ltd. with CNBC-TV18 dated 5th April 2021:

  • Escorts posted very strong 10 percent tractor sales growth in March compared to the previous month. FY21 ended on a strong note with total tractor sales rising 24 percent vs FY20.
  • Escorts achieved an annual production level of 100,000 units for the first time in its history on the back of robust growth in sales despite the Covid-19 pandemic.
  • The rural sentiment is expected to be strong after a good Rabi season and a favorable monsoon outlook.
  • Demand is expected to grow for the next 6 months on account of expansion in South India.
  • Rising Covid-19 cases has not yet impacted demand but remain a concern. However, it is not expected to hamper any supply-side considerations.

Asset Multiplier Comments:

  • The Company is witnessing a strong demand on account of economic recovery and the company is poised to continue this upward trajectory for the upcoming 2 quarters.
  • Overall, the outlook for the auto industry is favorable and the effect of supply chain issues seems to be muted so there’s scope for sustained growth.

Consensus Estimates (Source: market screener website):

  • The closing price of ESCORTS was ₹ 1,223/- as of 06-April-2021.  It traded at 15x/ 13x the consensus EPS estimate of ₹ 84/ 94 for FY21E/22E/23E respectively.
  • The consensus price target is ₹ 1470/- which trades at 16x the EPS estimate for FY23E of ₹ 94/-

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.”


Tough for industry to crank up quickly: TVS Motor Company

Update on the Indian Equity Market:

On Friday, NIFTY ended up 90 pts (+0.9%) at 9580 levels ahead of the release of GDP data for the January-March quarter of 2019-20 (Q4FY20). Among the sectoral indices, REALTY (4.3%), PHARMA (3.2%) and FMCG (3.0%) were among the top gainers while IT (-0.1%) and MEDIA (-0.04%) were the losers.
IOC (+7.5%), WIPRO (+6.3%) and ONGC (+5.1%) were the top gainers. AXISBANK (-2.3%), BHARTIARTL (-2.3%) and ADANIPORTS (-1.5%) were the top losers.

Edited excerpts of an interview with Mr. Venu Srinivasan, Chairman, TVS Motor Company:

TVS Motor Company Chairman speaks of the challenges ahead while easing the lockdown. Mr. Srinivasan believes the devastation caused by the pandemic is not going to disappear in a hurry

• His comments on COVID-19: It is going to be a very painful period in our economic history. He thinks we have to hunker down and go through it because there is definitely no stop to this infection. The truth is that Covid-19 is likely to stay around for a long, long time to come. Being a fast mutating virus, a vaccine may not be found very quickly either. Yet, the good part at least for now is that it is not so fatal, which means we will learn to get on with our lives and live with it. As he explains, this is information based on over five months of the virus being studied internationally which, in turn, could have played a key role in prompting many countries to ease up their lockdowns.
• During this time, there have been more updates coming in about Covid-19 and many Indian States have decided to open up factories in recent weeks. However, the recovery process will take time, especially when you have clogged all the wheels of the industry with grease which has caked and stuck. Add some rust to this and it is obvious that you cannot just switch it on and expect it to run.
• Srinivasan said that the top priority is to protect factories from accidents and make sure that all safety norms are in place. Right from furnaces to chemical reactors and heat exchangers, everything needs to be reset. Across the country, you have to evaluate the status of the plant and make sure that it is done in a systematic process.
• There are other challenges to contend with as the industry slowly limps back to a state of normalcy. Companies need to cope with the reality that lots of people, including the younger lot, are not turning up for work.
• For those living in containment zones, he advised them to stay there and not come to work since others will be put to risk in the process. However, there are people who are not in the containment zone but are still refusing to come to work because there is pressure from parents, spouses, children, and peers. There is a lot of fear but people are slowly coming in and we will have enough at work in TVS added Mr. Srinivasan.
• The situation is a lot more complex for ancillary suppliers, especially the small ones, categorized as Tier 2/3 vendors. These entities employ a lot of migrant labor who are clearly in no mood to return to the cities in a hurry.
• He also stated that migrants who have gone back with great difficulty to their villages while paying large sums of money. Some have even entirely lost their savings and they are not going to come back just because you say jobs are open from tomorrow.
• In this backdrop, he believes that it will take four to twelve weeks for “this wheel to start up and get running”. It is not as if everybody is going to come to work because factories are open, especially when it involves units which are further down the automotive supply chain. These encompass smaller ancillary suppliers with low value-added manual jobs and the impact will be even more significant for them. In and around Chennai, continues Srinivasan, there is a large migrant population in these small and medium auto ancillary units. Likewise, the construction industry is also “largely migrant-driven” and a major provider of employment.
• Given the situation, whatever we do, the industry cannot crank up that quickly. And once we crank up, he is not sure if demand is going to come back that quickly either said Mr Srinivasan.
• In other words, it is not just a question of production but also of demand which will take a few quarters coming through the system.
• He said that it is anybody’s guess if it will be two or three quarters even while pessimists are talking of six quarters. We have to see it day by day.
• No wonder he describes this as “an unprecedented situation” where the whole world has been compelled to opt for a lockdown. India was no exception to the rule either.
• He also added that when Covid first struck, there was nothing known about it and we had to take drastic action to protect our society. A few months have gone by and serious studies have shown that there is going to be no quick breakthrough in a vaccine.
• The good news for India is that the fatality rate is very, very low, unlike North America or Europe which have seen huge losses of lives. The next step, according to Srinivasan, is to evaluate the cost of livelihoods lost versus lives lost and the right thing to do now is to gradually and selectively open up the economy.
• However, this has to be done with care, especially if there is a big spread and hence the need for a phased/gradual manner he said. It is also clear now that it is better to quarantine the vulnerable part of the population rather than the whole country.
• WFH positives: From TVS Motor’s point of view, the entire exercise of working from home (WFH) has had some interesting positives. He observed a lot of staff functions that are not needed any more. Similarly, area and regional offices are not needed either since many of the people can work from home elaborated Srinivasan.
• Likewise, travel can reduce by up to 50 per cent on an average, especially air travel, which will come down dramatically. As he puts it, there is so much time lost going to the airport, being screened amid tight security before flying out and then spending time on the road all over again before reaching the final destination. We now realise that any time we went to meet someone for an hour, we ended up travelling seven hours from Chennai to either Mumbai or Delhi. Now, with digital taking over in the Covid-19 world, many meetings can be done comfortably online. Yet, it is not as if the physical part will be taken over completely since we also need to see people in board meetings and their body language, especially if someone is objecting to a certain proposal.
• He further added that there is the limitation of video conferences, where one only sees the person who is speaking. All meetings cannot happen online.
• According to Srinivasan, it is also difficult to predict all the changes that will happen in a post-Covid world. One school of thought subscribes to the belief that everyone will be hesitant to travel by public transport and private ownership of cars and two-wheelers will grow.
• From Srinivasan’s point of view, the positives will be better hygiene standards at least till the fear lingers and some paranoia persists. Likewise, he adds, personal space/distancing will grow with hugging and physical displays of affection taking the backseat.
• On the business side, digital buying of vehicles will increase and customers will be happier to check out road tests, spec comparisons and reviews online before zeroing in on a certain car or two-wheeler. This will save needless trips to dealerships.
• There has been a lot of debate on the excessive dependence on China as a single supply point for sourcing components especially during the pandemic. More recently, geopolitical tensions have peaked with the US, Australia and some European nations clearly livid with China for, what they feel, its alleged role in unleashing Covid-19 on the world.
• According to Srinivasan, long supply chains are going to be suspect going forward and manufacturers will have to produce some significant quantity in the free trade region where they will be selling products. For instance, this does not have to be the US, but Canada or Mexico.
• He cites the example of TVS Motor which, two years ago, decided to go in for a de-risk strategy in sourcing from China. There was no Covid-19 in sight then but many of its Chinese suppliers relocated to India following a carefully thought out plan.
• He said that they felt that there were a dozen parts which came largely from China. Even if the value was merely 10-12 per cent, it just meant that a bike could not be produced without them. They took a decision that they had to be made here and it really helped them.
• While the lockdown pretty much ensured that the wheels of industry came to a grinding halt, the fact remained that the China shutdown was no threat to our production at all. This was not true for other automakers, who felt the pinch when supplies from China were cut off.
• With Covid-19, the need to produce closer to home has also become more pronounced. From the industry’s point of view, the pandemic has posed a huge risk in terms of wreaking havoc across the supply chain. Shutting down borders, logistics, transport and so on have only made the situation more complex in India.
• The good part is that the lockdown has seen cleaner air and rivers, which only reinforces the need to keep this going even after economic activity resumes optimally in the coming weeks. Srinivasan thinks this is also a good opportunity for the Centre to spend more on the Swachh Bharat Mission where 20 cities, for instance, can be earmarked for a zero pollution drive.
• He stated that we need rigid enforcement of laws in sewage treatment. Small industries were releasing untested sewage and this is a wakeup call for the country to take Swachh Bharat seriously in terms of recycling, cleaning and reuse.
• For the auto sector which has made big investments in Bharat Stage-VI emission standards, the key is to continue the effort towards cleaner mobility. He informed that there was some degree of over-enthusiasm to go all electric in two years, which is just not feasible.
• It is his view that the world will take a couple of years to get back to normal in an L-shaped, and not V-shaped, recovery curve. He sees this situation as an opportunity to reset use of people, buildings, energy, travel and everything in life. How much less can we live with in terms of eating out, having simpler food, not buying as many clothes or having as many haircuts!!

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

• The closing price of TVS Motors was ₹ 337/- as of 28-May-20. It traded at 33.1x/21.6x the consensus EPS estimate of ₹ 10.1/15.4 for FY21E/ FY22E respectively.
• The consensus target price of ₹ 355/- implies a PE multiple of 23x on FY22E EPS of ₹ 15.4/-.

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.”

Sundaram Finance – Grabbing little pockets of opportunities available

Update on the Indian Equity market:

On Monday, NIFTY closed +0.22% higher. Among sectoral indices NIFTY Realty (+1.64%), NIFTY Auto (+1.47%), NIFTY Pharma (+1.19%) closed higher while NIFTY PSU Bank (-0.53%), NIFTY IT (-0.32%) ended on a negative note. The biggest gainers were ONGC (+5.50%), TATA Motors (+5.03%), Bharti Airtel (+2.62%) whereas Infosys (-3.50), Bajaj Finance (-2.65%), Bajaj FinServ (-1.22%) closed with high losses.

Excerpts from an interview with T.T Srinivasaraghavan, managing director, Sundaram Finance with CNBC- tv18

  • Talking about prevailing scenario in NBFC space Mr Srinivasaraghavan says NBFCs is probably the lousiest coinage that you could have for any industry, this is because it is as heterogeneous as anything could be.
  • However, he says, that clubbing everything together and saying NBFC is stressed sector will probably will be overstatement
  • Speaking about on ground situation he says, it is not looking much different and there are no signs on reviewal in short term.
  • There is overcapacity and nothing has happened much on the manufacturing side to soak up this additional capacity. Plus, the uncertainty about BS VI continues.
  • Right now, growth is not a priority from company’s point of view, because in a market which is tanking, it is not appropriate to swim against the tide and growing topline in an aggressive way is certainly not a part of the Sundaram Finance DNA.  
  •  The focus is making asset quality robust and grabbing coming opportunities.
  • Speaking about further quarters he says, higher delinquencies cannot rule that out, because in many states, there have been local issues where governments have either held back on payments to contractors or governments have rescinded contracts.
  • So, these local issues will certainly affect the cash flows.
  • Speaking about government purchases or the State Transport Undertaking (STU) purchases, he says, it is not really going to feed into business for banks and NBFCs but it will be a benefit for original equipment manufacturers’ (OEMs).
  • Mr Srinivasaraghavan says, now that interest rates have come down, corporate tax Is reduced. Corporates should come up and take some responsibility and do something that will help in near future instead of cribbing.
  • Mr srinivasaraghavan says the overcapacity is cyclical but this the longest one. He says, we should not worry about it in long term.
  • Scrappage is a welcome thing but it wont act as a magical wand. It has to accompanied by several other things.
  • He says, monsoon have been a great positive news in a gloomy horizon. At least we can hear about people enquiring, people may be looking at perhaps some buying, so post Diwali perhaps there could be some buying taking place.
  • He adds, that this time we will have a ‘pa’ shaped recovery, which is a Tamil alphabet. It is a flat line at the bottom, it is neither a U nor a V. It is two vertical lines on the side and a horizontal line connects both of them.

Consensus Estimate (Source: market screener website)

  • The closing price of Sundaram Finance was ₹ 1,610/- as of 14-October-19. It traded at 24.5x/ 21.5x/ 21.0x the consensus EPS for FY 20E/ FY 21E/ FY 22E of ₹ 65.6/ 74.7/ 76.5 respectively.
  • It trades as P/B 3.1x/2.8x/2.6x the consensus Book value per share for FY20E/FY 21E/FY22 of 507/568/607.