Sector Update |
8 July 2019
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BS6 conundrum: OEMs need to do a balancing act
MSIL/EIM least impacted, can potentially benefit from product actions
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 emission and reduce pollution, it will also exert pressure on
automakers to deal with increased investment toward compliance and technology,
particularly in a weak demand 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. Unlike in the past, this transition is unique in
many ways, and thus, would necessitate OEMs to do a balancing act.
BS6: Key Challenges
Impact on demand due to
Availability of BS6 fuel
earlier than Apr’20.
Quick ramp-down of BS4
vehicles and ramp-up of
BS6, particularly at
Inventory planning at
both OEM and supplier
end. - Testing &
validation of entire
portfolio by approving
Impart training across
Reduce complexity &
rationalize number of
With narrowing of
technology gap, export
opportunities open up
given India’s low cost
Scaling up alternative fuel
CNG, hybrids and EVs as
price gap reduces vis-à-
BS6 is likely to turn out to be the most expensive progression in India, resulting
in cost inflation of up to 15% (least for PV petrol at up to 4%). This is on top of
the most inflationary 12 months for auto customers over the last decade.
The upcoming BS6 transition is unique in many ways, making it even
difficult for OEMs (to strategize) and investors to draw any inference from
the past. Moreover, this is for the first time that (a) cost inflation is very high
and (b) the implementation is happening simultaneously across auto segments
(unlike staggered in the past).
Hence, OEMs will need to do a balancing act to minimize (a) risk of market
share loss (if transited too early), (b) risk of loss on inventory (if transited too
late) and (c) margin impact (due to discounts to clear inventory).
OEMs are indicating benefit of pre-buy to reflect in wholesales in 2Q/3QFY20,
while retails pre-buy would reflect in 3Q/4QFY20.
Hence, unlike in the past, the industry is likely to witness moderate
peaks/troughs in pre and post transition. This is contrary to what is expected
based on pre-buy history.
We expect cycles within cycles and volatility in volumes until 1HFY21 – volumes
recovery in 2HCY19, weak 1HCY20 and normalcy to return only in 2HCY21.
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
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 consequent weakness.
BS6 transition would narrow the pricing gap between ICEs and hybrid/EVs in the
2W (particularly 125cc scooters) and PV segments. We believe that BS6 could be
an inflection point for e-scooters and strong hybrid PVs.
MSIL is best placed for BS6 transition due to its less dependence on diesel (~23%
of MSIL's domestic volumes) and focus on CNG/strong hybrids.
In 2Ws, EIM is likely to be least impacted as cost inflation for BS6 would be
relatively less at 5-6%. With the transition, its core portfolio will get the much-
needed overhaul, with product quality potentially coming closer to 650cc twins.
We had recently lowered our FY20/21 EPS estimates across companies, with the
highest FY20 EPS cut for AL (~18%), CEAT (~17%), MSIL (~13.5%) & MM (~12%).
Jinesh Gandhi – Research Analyst
(Jinesh@MotilalOswal.com); +91 22 6129 1524
Investors are advised to refer through important disclosures made at the last page of the Research Report.
8 July 2019
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