Please refer to important disclosures at the end of this report Equity Research May 18, 2020 BSE Sensex: 30029 ICICI Securities Limited is the author and distributor of this report Sector update Automobiles Geographical deep dive into Covid impact: PV to decline 20% Research Analysts: Nishant Vass [email protected]+91 22 6637 7260 Pratit Vajani [email protected]+91 22 6637 7161 INDIA In this report we take a deeper state/district-wise look into demand and supply aspects arising from the heterogeneous nature of Covid-19 spread. Key observations include: 1) FY20 concentration of retail demand in risk areas (Red) remains high for both PVs and 2Ws at ~36% and ~30% respectively; however, demand and spread skews across states adds to heterogeneity; (2) state-wise analysis suggests >30% of wholesale despatches could be disrupted as these high-risk states remain large contributors to overall volumes; (3) interestingly, most of the high per-capita income states are facing the worst of the spread (tables: 4-5) and this could act impact high-ticket discretionary spend; (4) on supply chain side, we see a meaningful overlap (~80% and 60% in PVs and 2Ws respectively) between the manufacturing footprint and the risk zones. Impact of unknowns, e.g. ‘reverse labour migration / rise in infections’ are key monitorables over the coming period. Cut in industry growth estimates: We have reduced our volume growth estimates for the sector. We model PV segment decline of ~20% (from 2% earlier) and 2W segment decline of ~16% (from 2%). The relatively lower drop in 2Ws is primarily due to: a) lower demand exposure to risk zones; b) rural incomes likely to hold up better (driven by essential activities like agriculture) vis-à-vis urban (2Ws draw a higher demand share from rural); c) affordable mass-market segment is likely to partially benefit from any public transportation driven demand substitution by mid/low-income travellers. As a theme, we prefer mass market 2W/tractor vis-à-vis PV/CV companies. Stock calls: Post the recent rally, we downgrade mass-market 2W stocks Hero Motocorp and Bajaj Auto to ADD, retain our BUY rating on M&M, TVS and Eicher Motors. We retain SELL rating on Maruti Suzuki. Trends in red zone pivotal for retail demand trends: The share of retail sales from red zones (read highest risk) is nearly ~1/3 rd of overall demand in FY20 (tables 2-3). On segmental basis for PVs and 2Ws, the same is at ~35% and ~30% respectively. Interestingly, a few states have large skews between share of retails vis-a-vis share of districts marked in red zone, e.g. Karnataka and Gujarat have only 27% and 10% of districts in red zones; however, in terms of volume share, these two states account for ~48% and 52% of overall state retails for PVs. Another large skew is in Bihar (not in top-10 most affected states) where only 14% of districts are in red zone but those regions contribute ~38% of overall state PV retails. The red zones with lockdown extension till 31 st May could face further slip in consumer confidence. Top-5 most affected states; impact on wholesales: Statistics around these states are quite interesting (tables 4-5); they currently have ~74% of the confirmed Covid- 19 cases with only ~27% of overall country’s population. They however contribute ~40% to per capita income; the average per capita income of these five states is ~67% higher than the national average of Rs126.5k. These five states’ GSDP shares in the overall country’s manufacturing / services / construction are quite high at ~49% / 40% / 36% respectively. However, for agriculture their share is only ~27% of overall agriculture GDP. The average unemployment across these states has risen sharply by ~19% YoY to 25% in Apr’20; they contribute ~36%/32% (FY19) of overall demand in PV/2W segments. In summary, growth/employment and auto sales rebound in these states would largely depend on services and manufacturing sectors.
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Please refer to important disclosures at the end of this report
Equity Research May 18, 2020
BSE Sensex: 30029
ICICI Securities Limited is the author and distributor of this report
Sector update
Automobiles
Geographical deep dive into Covid impact: PV to decline 20%
with OEMs and suppliers suggest concerns around how operational structures like
Just in Time (JIT) would be implemented under the current uncertain environment.
The key worries we heard were: a) ramp-up of capacity and manpower in red zone
locations; b) possible start-stop at key suppliers could disrupt OEM production
schedules; c) availability of temporary workers (due to reverse labour migration)
post ramp-up in plants in low-risk manufacturing zones; d) deviation of policy
interpretation at local authorities level. We have tried to map the existing OEM
capacities across the various zones to evaluate the possible risks that could
emerge in the future. Overall, keeping in the mind the above-mentioned risks, we
believe productivity improvement across the entire value chain is likely to delayed,
as costs scale.
Table 7: Auto production commentary
Company Effective Date
Commentary
Maruti Suzuki 18-May Resumes production at Gurugram plant
Suzuki Motorcycles 18-May Resumes manufacturing operations at Haryana plants
Honda Motorcycles (HMSI) 15-May
Dispatched 21,000 units since reopening of dealerships
Tata Motors 13-May Resumes production at Pantnagar and Sanand plants. Reopens 600 dealerships across India
Ashok Leyland 13-May Restart production at all plants, ramp-up to be gradual as per supply chain readiness
Maruti Suzuki 12-May Restart production at Manesar plant on one shift basis with 50% workforce.
Hero Motocorp 10-May
Starts retail operations from 1st week May, with the reopening of more than 1,500 customer touchpoints including authorised dealerships and service centres; Retails 10k units in 1st week.
TVS Motors 08-May Restarts production in Hosur, Mysuru and Nalagarh plants
Hyundai 08-May Resumes production at Sriperumbudur, Chennai plant; Rolls out 200 cars on first day of operations
BMW 07-May Resumes production in Chennai plant
Volvo 07-May Resumes production in Chennai plant
Daimler ICV 07-May Resumes production in Chennai plant
Hero Motocorp 07-May Restarts production at Gurugram, Dharuhera and Haridwar plants
Maruti Suzuki 06-May 600 dealerships reopened
Daimler 06-May Restarts production at Chakan plant
Eicher Motors 06-May Royal Enfield to start production at Oragadam plant
Escorts 06-May Resume operations at Faridabad plant
Isuzu Motors 05-May To restart production at plant in Chitoor, AP
Hyundai 05-May 250 dealer outlets resume operations and retail sales
CEAT Tyres 04-May Resumes manufacturing at Nashik, Nagpur and Halol plants
Apollo Tyre 24-Apr Resumes production at Kalamsassery (Kerala) and Limda (Gujarat) plants
Suppliers Effective Date
Commentary
Bridgestone 13-May Resumes operations at Pune and Indore plants
Bosch 07-May
Resumes production in plants at Bengaluru, Naganathapura, Bidadi in Karnataka and Nashik plant in Maharashtra
Gabriel India 06-May Resumes production in Chakan, Sanand and Hosur plants
MRF Tyre 06-May Resumes production at most plants
TVS Srichakra 06-May Resumes production at Madurai and Uttarakhand plant
Bharat Forge 05-May Restarts manufacturing at Baramati plant
Federal-Mogul Goetze 05-May Resumes partial production in Patiala plant
Sandhar Group 04-May
To restart production at manufacturing facilities at Haridwar, Bawal, Jaipur, Nalagarh and Berhampur (Gurugram)
Minda Corporation 30-Apr Resumes operations at Pithampur (MP), Pantnagar (Uttarakhand) and Waluj (Maharashtra) plants
Varroc Group 28-Apr Restarts production at Chakan, Pantnagar and Waluj plants
Subros Ltd 28-Apr Restarts production at Manesar (Haryana) and Karsanpura (Gujarat) plants
Rico India 27-Apr
Starts production at Dharuhera and Bawal plant in double shift and Halol and Pathredi plant in single shift while Haridwar plant to work in three shifts
Endurance Tech. 27-Apr Resumes production at Pantnagar and Waluj plants
Ramkrishna Forgings 21-Apr Resumes production at Saraikela, Jharkhand plant
Source: Company data, I-Sec research
Automobiles, May 18, 2020 ICICI Securities
6
Table 8: Auto production mapping
State District Containment
Zone OEM
Production Capacity
Share of production in Red zone (%)
Rajasthan Alwar Orange Ashok Leyland 5,400
47%
Tamil Nadu Chennai (Ennore) Red Ashok Leyland 20,000
Tamil Nadu Kancheepuram (Pillaipakkam) Red Ashok Leyland 1,00,000
Tamil Nadu Krishnagiri (Hosur) Green Ashok Leyland 55,000
Tamil Nadu Pudukottai (Viralimali) Orange Ashok Leyland 1,800
Tamil Nadu Pudukottai Orange Ashok Leyland 400
Uttarakhand Uddham Singh Nagar (Pantnagar) Green Ashok Leyland 75,000
Maharashtra Aurangabad (Waluj) Red Bajaj Auto 6,60,000
70% Maharashtra Aurangabad (Waluj) Red Bajaj Auto 24,00,000
Maharashtra Pune (Chakan) Red Bajaj Auto 12,00,000
Uttarakhand Uddham Singh Nagar (Pantnagar) Green Bajaj Auto 18,00,000
Maharashtra Pune (Chakan) Red Daimler 20,000 100%
Tamil Nadu Chennai (Oragadam) Red Daimler India CV 73,500
Madhya Pradesh Dhar (Pithampur) Red Force Motors 33,000 100%
Maharashtra Pune (Chakan) Red Force Motors 30,000
Gujarat Ahmedabad (Sanand) Red Ford 2,40,000 100%
Tamil Nadu Chennai (Maraimalai Nagar) Red Ford 1,39,000
We align our estimates and recommendations based on the expectation of prolonged impact of Covid-19 related weak demand environment in most of CY20. We believe rural markets will remain a key monitorable for faster recovery.
Bajaj Auto – Valuation and earnings estimates
BAL continues to innovate in mass-market segments with strong cost focus and its
efforts to improve contribution margins of its entry level domestic offerings are
reflecting in the recent improvement in performance. This makes us more optimistic
over the company’s medium-term margin structure. We value BAL at a target multiple
of 15x FY22E EPS and downgrade the stock to ADD from Buy with a revised target
“In case of industry/sector reports or a report containing multiple stocks, the rating/recommendation for a particular stock may be based on the last released stock
specific report for that company.
This report may be distributed in Singapore by ICICI Securities, Inc. (Singapore branch). Any recipients of this report in Singapore should contact ICICI Securities,
Inc. (Singapore branch) in respect of any matters arising from, or in connection with, this report. The contact details of ICICI Securities, Inc. (Singapore branch) are
"In case of eligible investors based in Japan, charges for brokerage services on execution of transactions do not in substance constitute charge for research reports
and no charges are levied for providing research reports to such investors."
New I-Sec investment ratings (all ratings based on absolute return; All ratings and target price refers to 12-month performance horizon, unless mentioned otherwise)
BUY: >15% return; ADD: 5% to 15% return; HOLD: Negative 5% to Positive 5% return; REDUCE: Negative 5% to Negative 15% return; SELL: < negative 15% return
ANALYST CERTIFICATION /We, Nishant Vass, MBA (Finance); Pratit Vajani, MBA (Finance); authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts are not registered as research analysts by FINRA and are not associated persons of the ICICI Securities Inc. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI Securities Limited is a SEBI registered Research Analyst with SEBI Registration Number – INH000000990. ICICI Securities Limited SEBI Registration is INZ000183631 for stock broker. ICICI Securities is a subsidiary of ICICI Bank which is India’s largest private sector bank and has its various subsidiaries engaged in businesses of housing finance, asset management, life insurance, general insurance, venture capital fund management, etc. (“associates”), the details in respect of which are available on www.icicibank.com. ICICI Securities is one of the leading merchant bankers/ underwriters of securities and participate in virtually all securities trading markets in India. We and our associates might have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. ICICI Securities generally prohibits its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. Recommendation in reports based on technical and derivative analysis centre on studying charts of a stock's price movement, outstanding positions, trading volume etc as opposed to focusing on a company's fundamentals and, as such, may not match with the recommendation in fundamental reports. Investors may visit icicidirect.com to view the Fundamental and Technical Research Reports. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein. ICICI Securities Limited has two independent equity research groups: Institutional Research and Retail Research. This report has been prepared by the Institutional Research. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Retail Research. The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on a reasonable basis, ICICI Securities is under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities might be acting in an advisory capacity to this company, or in certain other circumstances. This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities accepts no liabilities whatsoever for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. ICICI Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months. ICICI Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction. ICICI Securities or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the companies mentioned in the report in the past twelve months. ICICI Securities encourages independence in research report preparation and strives to minimize conflict in preparation of research report. ICICI Securities or its associates or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither ICICI Securities nor Research Analysts and their relatives have any material conflict of interest at the time of publication of this report. Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. ICICI Securities or its subsidiaries collectively or Research Analysts or their relatives do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report. Since associates of ICICI Securities are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject company/companies mentioned in this report. ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Neither the Research Analysts nor ICICI Securities have been engaged in market making activity for the companies mentioned in the report. We submit that no material disciplinary action has been taken on ICICI Securities by any Regulatory Authority impacting Equity Research Analysis activities. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. This report has not been prepared by ICICI Securities, Inc. However, ICICI Securities, Inc. has reviewed the report and, in so far as it includes current or historical information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed.