Tag - Indian auto industry

Truck demand coming back; not enough buyers for buses – Ashok Leyland

Update on Indian equity market:
Markets continued the upward journey to end the truncated week as Nifty closed the day 140 points higher at 13,274. Within the index, ADANIPORTS (4.6%), HINDALCO (4.4%), and ICICIBANK (4.4%) led the index higher while RELIANCE (-0.8%), BAJAJFINSV (-0.6%), and HDFCLIFE (-0.6%) were three out of 11 losers. All the sectoral indices ended in the green with BANK (2.4%), PVT BANK (2.3%), and PSU BANK (1.5%) leading the pack.
Excerpts of an interview with Mr Anuj Kathuria, Chief Operating Officer, Ashok Leyland (AshokLey) published on CNBC-TV18 dated 3rd December 2020:
The monthly sales data for the month of November reported the seventh straight monthly improvement in sales, though the demand for buses was tepid.
He said that initial signs of demand coming back in the long-haul segment. The truck demand is coming back due to the movement of cement and steel whereas travel restrictions in the country have led to muted demand for buses.
The industry is witnessing growth in intermediate commercial vehicles. The tippers segment is holding strong and the company is expecting further improvement in MHCV (Medium & Heavy Commercial Vehicles) segment in December as well.
He said that the industry may see some replacement demand as the ownership cost of BS-VI (Bharat Stage-VI) is comparably lower. He also highlighted that state transport undertaking activity has intensified and the company is seeing more orders coming through.
The company is expected to show QoQ improvement in margins, but higher commodity prices could limit the gains.
Consensus Estimate: (Source: market screener website)
The closing price of AshokLey was ₹ 95/- as of 04-Dec-2020. It traded at 36x/ 20x the consensus EPS estimate of ₹ 2.6/ 4.8 for FY22E/ FY23E respectively.
The consensus target price of ₹ 90/- implies a P/E multiple of 19x on FY23E EPS of ₹ 4.8.
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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/-.