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15 Mar

Three-box framework for SUV-focus in EV space – M&M

Update on the Indian Equity Market:
On Monday, Nifty closed in the red at 14,930 (-0.7%), recovering from the day’s low due to a rebound in the metals and technology stocks. JSWSTEEL (+2.4%), TECHM (2.4%), and TATASTEEL (+2.3%) led the index gainers while DIVISLAB (-2.9%), BAJAJFINSV (-2.7%), and GAIL (-2.6%) led the laggards. Among the sectoral indices, METAL (+1.0%), IT (+0.6%), and PSU BANK (+0.2%) were the only gainers while MEDIA (-1.4%), PHARMA (-1.3%), and FINANCIAL SERVICES (-1.2%) led the laggards.

Mahindra & Mahindra (M&M) recently reorganized its EV (Electric Vehicle) strategy by setting up 2 new verticals, one for last-mile mobility, and the other for EV tech center. Mr. Rajesh Jejurikar, ED- Auto and Farm Sectors, M&M explained the rationale behind this strategy on CNBC TV-18 on 12th March 2021. Here are the excerpts of the interview:

  • To undertake a comprehensive look at the future, M&M has deployed a three-box framework. This framework suggests different businesses need different kind of attention and focus depending on company strategy and goals. Box 1 is the one that has the ability to scale up/Box 2 and 3 are more mid-long-term focus and need more technology and know-how.
  • According to M&M, Last mile mobility is a box 1 business, which has a ready customer market today and they have to drive growth and penetration. Their box 2 business is the SUV focus IC-derived electric vehicles, and box 3 is EV which is preparing M&M’s strategy for the longer term.
  • They have created a strong talent pool with good products at Mahindra Electric, which will help them in the future as well.
  • They want to be SUV-focused in EV space as well. Currently, there are no plans of manufacturing EVs in shared mobility space (Sedans and hatchbacks).
  • They believe the EV market penetration to be much higher by 2025-30, hence the need for a comprehensive SUV EV portfolio. They hope to have an electric variant for all price points they operate in.
  • The level of readiness should be for 50-80% conversion in FY2025-30. The extent of conversion is very hard to predict at this stage so they are not setting any targets per se.
  • They will launch eKUV100 and eXUV300 between CY21-CY22.
  • The last-mile mobility segment is at an inflection point and the pace of sales should pick up significantly. The goods carrier segment is completely ready and a committed sales team and channel will help drive sales for this segment. The PV (Passenger Vehicle) was also ready but the slowdown due to Covid-19 has hampered the sales and M&M expects sales to pick up in 2HCY21.
  • For last-mile mobility, export is a huge opportunity. M&M is already getting leads for alliances and partnerships in different markets across the world. Some of their key customers in the B2B segment are planning to take M&M products in their global ecosystem. While these deals will take some time to fructify, the initial response has been good.
  • When M&M canceled their JV with Ford, the rationale was the money saved from JV will be put into the EV business. Rs 30,000 mn has been set aside for creating a strong EV portfolio.

Asset Multiplier Comments

  • With the Covid-19 outbreak, the personal mobility demand has increased. Though Gen Z and millennials would prefer EVs for personal mobility, the success of EVs would largely depend on increasing penetration and availability of the infrastructure, which is currently lacking.
  • M&M has been stressing on reducing investments in non-profitable subsidiaries and focusing on the core business. This three-box framework for EV vertical is a step in the right direction.

Consensus Estimate: (Source: market screener and tickr websites)

  • The closing price of M&M was ₹ 846/- as of 15-March-2021. It traded at 31x/ 21x/ 18x the consensus earnings estimate of ₹ 27.4/ 41.1/ 46.8 per share for FY21E/FY22E/FY23E respectively.
  • The consensus target price of ₹ 959 implies a PE multiple of 20x on FY23E EPS of ₹ 46.8/-.

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.”

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10 Feb

Reducing non-core debt to pare debt: Tata Motors

Update on the Indian Equity Market:

After a week-long rally, investors booked profits which led to a fall of 52 points in Nifty to close at 12,087. This follows the weak Asian markets following the rising death toll from a virus spreading from China. Apart from result season, there was no major catalyst to move the markets on Friday. Within the sectoral indices, Media (1.7%), Pharma (0.6%) and IT (0.5%) closed the day higher while REALTY (-1.8%), AUTO (-1.0%) and PVT BANKS (-0.5%) were the highest losers. Among the index stocks, ZEEL (5.5%), NTPC (3.2%) and COALINDIA (2.8%) led the gainers whereas EICHERMOT (-3.1%), TATAMOTORS (-3.0%) and INDUSINDBK (-2.7%) brought the index lower.

Reducing non-core debt to pare debt: Tata Motors

Excerpts from an interview with Mr Guenter Butschek, MD & CEO – Tata Motors published in Livemint on 7th February 2020.

  • Mr Butschek said that the company has invested sufficiently in its product library that includes common vehicle architectures, powertrains, transmissions, and other shared technologies to reduce overall product development cost.
  • He is confident that in the coming two years, the company will see strong growth as far as modularity is concerned across commercial and passenger vehicles. He said that the company has done homework on its turnaround plans, investing in new technology platforms such as CESS (connected, electric, shared and safe mobility) and tapping into the Tata Group companies’ strengths to build an electric vehicle (EV) ecosystem.
  • Referring to the company’s efforts to strengthen its financials, he said Tata Motors has turned cash accretive despite the collapse of the medium and heavy commercial vehicle (MHCV) segment, which contributes 47% of total commercial vehicle revenue that accounts for 65% of total domestic revenue.
  • The product portfolio of company is much better than what it was when the economic slowdown began two years ago. He is confident that once the economy revives, the significantly upgraded products would do much better in terms of cost-based contribution to company’s margin base.
  • Butschek said that customers would take a while to absorb the higher cost of purchases under BS-VI emission norms, which would entail a product price increase of 10-15%.
  • The company had ₹ 233,365 mn worth of debt in its India business as of 30th September 2019. The consolidated debt including Jaguar Land Rover (JLR) stood at ₹954,650 mn. He said that the company is planning to reduce non-core assets to reduce the debt.
  • The company is focusing on reducing costs, including material costs and working to enhance productivity.
  • As part of its turnaround plan, Tata Motors plans to launch 12-14 passenger vehicles over the next three to five years, besides at least four new electric vehicles over the next 18-24 months.

Consensus Estimate: (Source: market screener website)

  • The closing price of Tata Motors was ₹5/- as of 07-February-2020. It traded at 109x/ 11x/ 7x the consensus earnings estimate of ₹1.6/ 15.4/ 24.7 for FY20E/ FY21E/ FY22E respectively.
  • Consensus target price of ₹ 201 /- implies a PE multiple of 8x on FY22E EPS of ₹ 24.7 /-
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17 Oct

In 2-3 years, Bharat Forge will not look like a forging company.

Update on  Indian Equity Market:

On Wednesday, NIFTY was up 0.4% to close at 11,472 level. The top performers that aided the positive movement in the index were BPCL (+4.3%), Bajaj Finance (+3.8%) and Zee (+3.7%). Hero (-2.8%), Vedanta (-2.5%) and Hindalco (-2.4%) were the worst-performing NIFTY stocks. Among the sectoral indices, NIFTY IT (+1.0%), NIFTY MEDIA (+0.8%) and NIFTY REALTY (+0.8%) were the top gainers. NIFTY PSU BANK (-0.8%), NIFTY METAL (-0.5%) and NIFTY AUTO (-0.2%) were the top losers.

In 2-3 years, Bharat Forge will not look like a forging company.

Excerpts of an interview with Mr Baba Kalyani, Chairman and MD, Bharat Forge. The interview was published in Mint dated 15th October 2019.

  • There is some order coming back into the auto industry with retail demand beginning to increase and production being curtailed to get the inventory down. It will take a little while before the order is restored completely and growth will come after that. It will take a couple of months for the inventory to get to a proper level.
  • The largest slowdown is in domestic medium and heavy market with month on month declines of 40-50%. The industry has never seen this kind of slowdown.
  •  Among the international markets, North America and Europe are going at reasonable levels. There is some pick up happening in Brazil. The problem is in the Indian vehicle market which needs to get sorted out.
  • Bharat Forge is doing reasonably well in the railways’ segment. It is a niche market that is not high in volume. Bharat Forge has 4 customers which are the major OEMs. Along with crankshafts, the company is starting to move towards turbochargers, connecting rods. They are trying to enlarge the business by enlarging the product mix. 
  • In the aerospace segment, Bharat forge has consciously decided to move to high-value niche products. The company manufactures critical components such as turbine blades, shafts, and landing gears. They are not into the high volume structure side of the business as it has too many participants and the margins are not great.
  • It takes a long time to become a supplier in the critical components such as the turbine blades or rotating shafts. These are very critical and safety components that cannot be failing. Bharat Forge has been successful in becoming a supplier of these components and the management hopes to start seeing better volumes.
  • The current downturn, although painful, is helping the company to reshape and restructure itself from a product, process, and technology point of view. 
  • In the next 2-3 years, Bharat Forge will not be seen as a forging company. It will become a technology company.  The company is doing a lot of things in the electric vehicle space and other technology spaces. They have developed a promising new technology space using their nanotechnology expertise of converting waste to wealth. 

Consensus Estimate (Source: market screener website)

  • The stock price was ₹ 428/- as of close of 16-10-19 and traded at 20x/ 18x/ 16x the consensus EPS for FY20E / 21E / 22E EPS of ₹ 21.4 /23.5 /26.5 respectively.
  • Consensus target price of ₹ 444/- implies a PE multiple of 17x on FY22E EPS of ₹ 26.5/-.
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