Indian Automobile Sector - Outlook FY20

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Date – 30th August, 2019
Indian Automobile Sector
(Outlook FY20)
Tough time continues for automobile
companies…….
Index
1. Sector Performance till Q1FY20
2. Sector Performance till July 2019
3. Implementation of BS 6 Norms
4. New Scrap-page Policy 2020
5. Changing landscape of Indian Auto Industry “The EV”
6. Recommended Companies
 Escorts Limited
 Ashok Leyland Limited
 TVS Motor Company Limited

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Sector Performance till Q1FY20
India currently ranks among the top five automotive markets in the world and it is the world’s largest two-wheeler market. The automobile industry
accounts for more than 7% of India’s GDP. On an average, the country’s automobile sector boasts of an annual production of around 24mn vehicles and
the sector employs over 29mn people (directly and indirectly). To put things in perspective, India is the world’s largest tractor manufacturer, largest
two-wheeler manufacturer, second largest bus manufacturer, fifth largest heavy truck manufacturer, sixth largest car manufacturer and eighth largest
commercial vehicle manufacturer.
FY20 to begin in slow lane
We expected H1FY20 of automobile industry is going to be subdued. Following are the reasons for this subdued demand during H1FY20 .
1) Due to high base Q1FY19
2) Purchase deferrals during elections
3) Tight liquidity conditions.
4) Negative sentiment in rural market
5) Spike in insurance cost
6) Fear of reduced resale due to the upcoming BS-6 norms
The Street should focus on management commentary on volume revival ahead, led by pent-up demand and BS6 pre-buying, which should aid a
better end to FY20. Within auto, we prefer PV companies that are relatively less affected by the BS6 transition.
Auto monthly Sales Volume - Q1FY20
Type of vehicle Q1FY19 Q4FY19 Q1FY20 YoY MoM Type of vehicle Q1FY19 Q4FY19 Q1FY20 YoY MoM
Two Wheeler Commercial Vehicles
Hero MotoCorp Ltd 2,105,219 1,781,250 1,842,920 -12.46% 3.46% TataMotors Ltd 111,642 127,117 94,934 -14.97% -25.32%
Bajaj Auto Ltd 594,234 610,094 610,936 2.81% 0.14% Mahindra & Mahindra Ltd 56,940 68,202 51,594 -9.39% -24.35%
TVS Motor Company Ltd 892,754 865,789 883,670 -1.02% 2.07% Ashok Leyland Ltd 42,128 59,521 39,608 -5.98% -33.46%
Royal Enfild 219,725 189,372 174,430 -20.61% -7.89% Farm Equipments
Three Wheeler Mahindra & Mahindra Ltd 100,784 60,878 86,350 -14.32% 41.84%
Bajaj Auto Ltd 94,431 102,258 86,217 -8.70% -15.69% Escorts Ltd 24,494 25,136 21,051 -14.06% -16.25%
TVS Motor Company Ltd 35,520 41,539 39,475 11.13% -4.97% Exports
Mahindra & Mahindra Ltd 13,005 18,598 13,136 1.01% -29.37% Bajaj Auto Ltd 537,976 481,238 550,021 2.24% 14.29%
Passenger Vehicles Royal Enfild 5,636 6,790 9,159 62.51% 34.89%
Maruti Suzuki India Ltd 463,840 428,863 374,481 -19.27% -12.68% Maruti Suzuki India Ltd 26,639 29,616 28,113 5.53% -5.07%
Tata Motors Ltd 52,937 53,746 36,945 -30.21% -31.26% Tata Motors Ltd 11,955 12,152 5,667 -52.60% -53.37%
Mahindra & Mahindra Ltd 60,779 77,627 59,400 -2.27% -23.48% Mahindra & Mahindra Ltd 9,377 10,252 7,559 -19.39% -26.27%
Source – ULJK FinancialServices Pvt Ltd

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Sector Performance till July 2019
Automobile stocks have borne the brunt of slowdown which has gripped the sector during the last one year. Sales in auto sector have fallen in 12 out of
13 months since July 2018 signaling sharp slowdown in demand in the world's fourth-largest automobile market.
Sales of passenger vehicles to car dealers fell 30.9% to 2,00,790 units in July 2019 over July 2018 signaling a slump in demand from consumers, data
released by the Society of Indian Automobile Manufacturers (SIAM)). This was also the steepest since December 2000 when it had declined by 35.22 per
cent. Commercial vehicle sales fell from 25.7% to 56,866 units, as per SIAM. Motorcycle and scooters sale fell from 16.8% to about 1.51 million units,
while passenger car sale fell from 36% to 122,956 units, as per data.
Data also showed that domestic passenger vehicle production was down nearly 17% during this month. Mirroring the weak consumer sentiment and
slowdown in the sector, S&P BSE auto sector index fell to 35% during the last year, with home-grown Tata Motors losing 55% in the same period. NSE's
Nifty Auto index too fell from 36.70% last year.
Other auto stocks such as Maruti Suzuki (33%), Mahindra and Mahindra (46%), Ashok Leyland (50.31%) , Hero MotoCorp (19%) and TVS Motor (31.21%)
have logged substantial losses in the last one year. The only exception among auto stocks was Bajaj Auto which saw a rise of 1% during this period on
BSE
Stocks of auto component manufacturers also took a hit. Motherson Sumi, the manufacturer of automotive wiring harnesses, mirrors for passenger
cars and a leading supplier of plastic components and modules to the automotive industry saw a 53% fall in its share price during last year. Similarly,
Minda Industries, tier-1 supplier of automotive components, too lost 23% during last year. Bosch, another auto component manufacturer, fell 27.56%
during this period.
According to industry body SIAM, the entire auto sector is reeling under a prolonged slump, affecting vehicle sales across all segments. In July,
wholesale passenger vehicle sale fell for the ninth straight month amid overall slowdown in the economy.
Retail sales of automobile fell from 6% year-on-year to 16,54,535 units in July 2019 compared to 17,59,219 units, according to the data released by
Federation of Automobile Dealers Associations (FADA). FADA this month said around two lakh jobs has been cut across automobile dealerships in India
in the last three months as vehicle retailers takes the last resort of cutting manpower to tide over the impact of the unprecedented sales slump. The two
lakh job losses in the last three months are over and above 32,000 people who lost employment when 286 showrooms were closed across 271 cities in
the 18th-month period of April this year.

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Implementation of BS 6 Norms
Indian automakers are all set to transition to Bharat Stage (BS) 6 norms next
year. With these norms being based on Euro 6 standards, India will become
the first country in the world to leapfrog from Euro 4 to Euro 6 (skipping
Euro 5) norms. Although BS6 will bring in much stricter control on emissions
and reduction in pollution, it will also exert pressure on automakers to deal
with increased investment towards compliance and technology, particularly
demanding in a weak environment. While this has the potential to create
disruption in the industry, it will also present an opportunity for well-
prepared OEMs to gain competitive first-mover advantage.
Impact of BS 6 Norms
1) Cost inflationof up to 15%
2) Risk of market share loss
3) Risk of loss on inventory
4) Margin impact
5) Benefit of pre-buy
We expect PVs to be least impacted during the BS6 transition due to the
limited cost increase for petrol PVs (~70% of industry volumes) and the scope
in alternative fuels. On the other hand, 2Ws/CVs would be most impacted by
very high cost inflation. The impact on CVs will be determined by economic
viability and freight availability. 2Ws could see substantial pre-buy and
consequentweakness.
Advantagesof BS VI over BS IV
1) NOx emission will come down by approximately 25% for the petrol engine
and 68% for the diesel engines.
2) The PM emission will see a substantial decrease of 80% in diesel engines.
3) OBD (On-board diagnostics) will become mandatory for every vehicle and it
will help monitor the pollution caused by the vehicle in real time.
4) RDE (Real Driving Emission) will be introduced for the first time that will
measure the emissions in real-world conditions and not just under test
conditions.
5) Bharat Stage VI norms will also change the way particulate matter is
measured. It will now be measured by number standard instead of mass
standard thereby, regulating the fine particulate matter as well.
Why India Felt the Need to Leapfrog from BS IV to BS VI
1) India is a country with 10 most populated cities of the world and
this is one distinction we should not be proud of.
2) Vehicular emission is a major contributor to the worsening air
quality of Indian cities. Emission of NOx, SO2, CO2 and particulate
matter is taking a toll on people’s health. In cities like Delhi, the
PM2.5 level is more than 6 times the prescribed levels by WHO.
3) In October 2016, India signed the Conference of Protocol also
known as the Paris Climate Agreement. Being a signatory to the
agreement, India is obligated to bring down the carbon footprint
by 33-55% from the levels recorded in 2005 in the next 12 years.
4) This warranted the need for a stricter norm that could reduce the
emissions considerably and put India on track to meet the Paris
agreement goals.
5) Ideally, BS V would have been rolled out by 2021 and BS VI in
2024, but leapfrog to Bharat Stage VI norms by 2020 had to be
planned because of the carbon footprint obligations.

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Implementation of Scrap page policy to boost the demand for
new vehicles?
Government Initiatives
1) The government’s plan to offer incentives for scrapping vehicles older
than 15 years may do little to boost sales at a time when the country is
facing its worst auto slowdown in a decade.
2) Buyers will not have to pay registration fees if they dump old vehicles,
according to a draft scrap-page policy released by the central
government. The draft, however, doesn’t make it mandatory for users
to scrap older vehicles.
As per the latest update, the two major changes made to the policy draft
include change in the age of the vehicle from 15 years to 20 years, and cut
off date for implementation.
As per the rating agencies
1) The much-awaited policy has received a go-ahead from the Prime
Minister’s Office, and is awaiting approval from the Goods and Services Tax
(GST) Council.
2) As per the Crisil research (Market Research), The new policy for scrapping
vehicles over 20 years of age is likely to have limited impact, and may not
boost demand for new vehicles significantly.
3) The total population of commercial vehicles that will be older than 20 years
in fiscal 2021 would be 50,000 vehicles, much lower than the government’s
earlier estimate of 2.8 crore vehicles. In any case, 70,000-90,000 vehicles
are scrapped every year. So, we believe the impact of the scrap-page policy
will be limited.
4) “Medium and heavy commercial vehicles (M&HCVs) that typically have a
life of 20 years, would be eligible under the scheme.” Under M&HCVs,
medium commercial vehicles (16 tonne gross vehicle weight) would benefit
the most, while the number of multi-axle vehicles, intermediate
commercial vehicles (ICVs), tractor trailers and light commercial vehicles
opting for the scheme would be very limited.
5) The benefit offered under the scrap page policy would be 15% of the
vehicle’s price. But this advantage would be muted as prices of diesel
vehicles were expected to rise 10-15% once the new norms (BS-VI) comes
into force by 1st April 2020.

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Changing landscape of Indian Auto Industry “The EV”
Over the years, the exploitation and the pollution of natural resources have
created the need for renewable and environment-friendly products. One of
these products is Electric Vehicles. Electric Vehicles are the replacement for
petroleum-based vehicles. They are one of the emerging technologies as
well as eco-friendly and viable. The replacement of internal combustion
engines with electric engines will reduce pollution to a great extent and be
profitable to consumers. Many countries around the globe have
implemented this technology and are contributing towards amelioration of
the environment. We are going to see the advantage and disadvantage
faced in India over implementing electric vehicles.
Niti Aayog Approach
1) Niti Aayog has proposed that only electric vehicles should be sold in India
by 2030.
2) Niti Aayog has proposed that two-wheelers below the capacity of 150 cc
will be sold in the country after March 31, 2025, should be electric ones
only.
3) The Aayog has also proposed that three-wheelers sold in the country
should be electric ones only after March 31, 2023.
Conclusion
The implementation of EVs in India aims primarily to reduce greenhouse gas
emissions and cut oil expenses. The vision 2030 put forth by the Indian
Government is an ambitious and difficult task. The Government should make
the most out of the opportunities available and find suitable ways to tackle the
challenges impending over the implementation of EVs. India’s obligation
towards many environment friendly agreements has given it a situation where
it is prompted to implementvision 2030
Electric Car In India Vision 2030
Advantages Disadvantages
1) No Gas Required 1) Recharge Points
2) Savings 2) Electricity isn’t Free
3) No Emissions 3) Short Driving Range and Speed
4) Popularity 4) Longer Recharge Time
5) Safe to Drive 5) Silence as Disadvantage
6) Cost Effective 6) Normally 2 Seaters
7) Low Maintenance 7) Battery Replacement
8) Reduced Noise Pollution 8) Not Suitable for all Cities

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Escorts Limited
CMP - NIR 509
TP - NIR 928
Financials
Valuation
At CMP of INR 509 the stock is trading at 11.28x – it’s FY20E EPS of INR 45.11and 9.37x – it’s FY21E EPS of INR 54.35. We recommend to accumulate the stock
with a target price of INR 928 per share.
Ashok Leyland Limited
CMP - INR 64
TP - INR 92
Financials
Valuation
At CMP of INR 64 the stock is trading at 8.23x – it’s FY20E EPS of INR 7.78 and 8.00x – it’s FY21E EPS of INR 8.00. We recommend to accumulate the stock with a
target price of INR 92 per share.
(INR In mn)
Year Net Sales EBITDA PAT EPS ROE ROCE PE EVEBITDA
FY17A 228,710 32,939 16,371 5.75 23.45% 17.06% 11.13 8.22
FY18A 296,196 42,484 18,266 6.24 22.15% 18.68% 10.26 6.98
FY19E 331,968 49,100 21,946 7.48 22.35% 17.52% 8.56 6.54
FY20E 382,036 56,350 22,834 7.78 20.38% 18.09% 8.23 5.54
FY21E 401,340 59,198 23,475 8.00 20.86% 17.95% 8.00 5.36
Source - Uljk Research, Ashok Leyland
(INR In mn)
Year Net Sales EBITDA PAT EPS ROE ROCE PE EVEBITDA
FY17A 40,932 3,672 2,011 16.41 10.10% 13.95% 31.02 16.96
FY18A 49,951 6,166 3,447 28.12 13.53% 20.98% 18.10 9.63
FY19E 61,964 8,141 4,837 39.46 16.00% 21.80% 12.90 7.71
FY20E 62,901 9,193 5,529 45.11 15.60% 23.58% 11.28 6.00
FY21E 72,561 10,939 6,662 54.35 15.96% 24.05% 9.37 4.08
Source - Uljk Research, Escorts Ltd

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TVS Motor Company Limited
CMP - INR 352
TP - INR 509
Financials
Valuation
At CMP of INR 352 the stock is trading at 19.34x – it’s FY20E EPS of INR 18.20 and 17.51x – it’s FY21E EPS of INR 20.11. We recommend to accumulate the stock
with a target price of INR 509 per share.
(INR IN mn)
Year Net Sales EBITDA PAT EPS ROE ROCE PE EVEBITDA
FY17A 124,626 8,688 5,093 10.72 22.89% 20.70% 32.84 21.53
FY18A 163,403 15,425 6,648 13.99 23.26% 15.09% 25.16 20.62
FY19A 201,600 21,608 7,254 15.27 21.24% 15.08% 23.05 14.33
FY20F 217,020 23,655 8,649 18.20 21.34% 14.85% 19.34 11.42
FY21F 242,570 26,440 9,553 20.11 20.05% 14.39% 17.51 10.38
Source - Uljk Research, TVS Motor CompanyLtd.

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