Tag - auto slowdown

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.”

Business cannot take priority over the safety of people- Mr Pawan Goenka, MD, Mahindra & Mahindra

Update on the Indian Equity Market:

On Tuesday night, PM Narendra Modi announced a nationwide lockdown for the next 21 days to fight against the spread of Covid-19. On Wednesday, NIFTY continued gains for the 2nd day and ended at 8,318 (+6.6%). This rally might be in the expectation that an economic package to counter economic disruptions might be announced soon.

Among the sectoral indices, Financials gained the most while no sector index ended negatively. FIN SERV (+9.7%), PVT BANK (+8.5%) and BANK (+8.4%), AUTO (+4.3%) were the top gainers. Out of the NIFTY50 stocks, RELIANCE (+13.8%), HDFCBANK (+12.4%) and KOTAKBANK (+11.9%) rallied the most. INDUSINDBK (-3.3%), IOC (-3.1%) and COALINDIA (-2.8%)  were among the few stocks that ended in red.

Business cannot take priority over the safety of people- Mr Pawan Goenka, MD, Mahindra & Mahindra

Edited excerpts of an interview with Mr Pawan Goenka, Managing Director of Mahindra & Mahindra; dated 23rd March 2020. The interview aired on CNBC-TV18.

  • As a contribution to tackling the Covid-19 crisis, the Mahindra Group has taken certain steps. The Group has started work on how their manufacturing facilities can be used to make ventilators. They have put their projects team on standby to assist the government or the army in erecting temporary care facilities. In addition, Mahindra Holidays will offer their resorts as temporary care facilities.
  • The foremost consideration is given to the well-being of the group’s employees. Plants in Nagpur, Kandivali and Chakan have already shut down. Over the next few days, most plants will be shut down.
  • No one is in a mood to buy cars right now. Dealerships are also shutting down due to lockdowns. The automotive business is slowing down. Tractor business is also slowing down, although not to the same extent.
  • Mahindra Group is playing it by the day as things are very dynamic. It is difficult to predict how long the shutdown will last. If lockdown lasts only until 31st March, the business that has slowed down will come back in the next 2-3 months. If lockdown lasts longer than 31st March, the comeback will take much longer.
  • Need for tractors in agriculture cannot disappear. The tractor buying peaks in May-June period. If Mahindra does not miss out this season, then the tractor business will be fine. However, to tap that season, production will have to take place in April. But in the current scenario, the business will not take priority over the safety of the Group’s people and communities.
  • For the auto and tractor business point of view, the foremost responsibility of the company is to make payments to its suppliers and low wage earners-especially the contract workers and daily wage workers.
  • Mahindra Finance is closely watching the concern of liquidity in the market. There is a concern of EMI payments not happening but that will not happen immediately. The farmers have probably already received revenue from the previous cycle and so there might not be an issue.
  • The big unknown from the perspective of Mahindra Financial is what will happen to the financial cycle, i.e money coming into the NBFC from both borrowings and EMI payments. It is very important to get that cycle going. But right now, the sales pull will also be less hence the demand for financing will be less.
  • The group has an advantage in terms of business diversification.
  • Mr Goenka is of the opinion that although the Government is also under pressure and we should not expect too much, the government has to step in at this point. Mr Goenka has mentioned three things that he expects from the government at this point:
  1. For the auto industry, the immediate issue is the 31st March deadline to liquidate BS-IV inventory. It is not in the hands of the Government as it’s a supreme court matter. Mr Goenka is hoping that the court extends the deadline and gives extra time to liquidate the BS-IV vehicles. As no OEM is manufacturing BS-IV vehicles any longer, there is no problem of excessive dumping of those vehicles.
  2. The second area where Government intervention is needed is to help in the liquidity situation. If a moratorium of say 3 months is imposed on recognition of EMI non-payment as NPAs, NBFCs will be able to have a bit of a breathing room. The government needs to ensure that the financial cycle does not break down because it will take a long time to repair if broken.
  3. Thirdly, the Government must not delay any payments due to the industry as right now the industry needs funds.

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

  • The closing price of M&M was ₹ 274/- as of 25-March-2020. It traded at 7.2x/ 7.7x/ 6.7x the consensus EPS estimate of ₹ 38.3/ 35.4/ 40.6 for FY20E/ FY21E/ FY22E respectively.
  • The consensus target price of ₹ 651/- implies a PE multiple of 16.0x on FY22E EPS of ₹ 40.6/-

“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.

Most of the auto slowdown is the industry’s making

Dated: 23rd August 2019

Updates on the Indian market:

On Friday, markets closed in the green with BSE Sensex up 0.6% and NSE 50 up 0.8%. This was a reaction to the news that Finance Minister Nirmala Sitharaman was planning to hold a press conference after market hours.  The market expects a government intervention to revive the economy. The top gainers among NIFTY 50 stocks were Zee (+6.5%), UPL (+6.2%), Vedanta (+5.7%). Indusind Bank (-1.8%), ITC (-1.5%), Eicher Motors (-0.9%) were among the top NIFTY 50 losers. Among the sectoral indices, Media (+4.2%) and Metal (+3.4%) were the best performers while FMCG (-0.4%) and Private banks (-0.4%) were the worst performers.

Excerpts from an interview with Mr. Rajiv Bajaj- MD, Bajaj Auto published in mint dated 23rd August 2019: Most of the auto slowdown is the industry’s making

·       For the motorcycle industry, the YoY decline in sales is only 5-7%. This cannot be called a crisis. It is part of a normal industry cycle and a check for the robustness of a business model.

·       There are 4 areas where the auto industry has to improve before talking about government stimulus:

o   Industry’s domestic focus: Barring Bajaj Auto (40% revenue from exports) and TVS Motors (20% revenue from exports), other players have a negligible share of exports.  If companies had invested in global markets over the last 10-15 years and increased their exports, a 5-7% decline in one market would not have hurt them as much as it is hurting now.

o   Mediocre products: A lot of auto players are not able to export because their products are mediocre by world-class standards.

o   Innovation in the domestic market

o   Cost structure: Some manufacturers are guilty in terms of imposing very high fixed costs on their dealerships.  This works in good times but becomes a big burden in bad times.

·       Inventories have piled up since September 2018 when the industry was anticipating an extraordinary festive season. The situation is correcting now as nobody can hold BSIV stock for long. Therefore, there is a mismatch between wholesale (OEM to dealers) and retail (dealer to the customer) sales. The mismatch makes it look as if the industry is down by 15%-20% when in reality it is down by 5-7%. A 5%-7% retail decline is not enough for the industry to cry for help.

·       The industry has said there is a need for intervention in dealer/customer financing. Inventory financing should not be a big issue for large companies most of whom are cash-rich. In case of retail consumer financing, for a long time companies using their captive financing arms have shoved products in the hands of customers who didn’t really want to buy. This led to higher bad debts.  So pulling back of credit by some NBFCs is for a good reason.

Consensus Estimate (Source: www.marketscreener.com)

·       The stock price of Bajaj Auto is Rs 2,750/- as on 23rd August 2019 and trades at 17.2x/ 15.8x the consensus EPS for FY 20E/21E EPS of Rs 160/ Rs 173 respectively.

·       Consensus target price is Rs 2,686/- valued at 15.5x FY21E EPS of Rs 173.