Motilal Oswal Financial Services

Automobiles

Sector Update | 7 May 2020

Automobiles

Reverse DCF suggests moderation

in implied terminal growth

Implied

Terminal

growth (%)

Bajaj Auto

4.1

Hero MotoCorp

4.9

TVS Motor

4.0

Eicher Motors

3.2

Maruti

4.6

M&M (incl MVML)

3.6

Tata Motors

-0.8

Ashok Leyland

1.5

Escorts

4.8

Bharat Forge

2.0

Exide Industries

4.1

Amara Raja

6.1

BOSCH

7.9

Endurance Tech

4.1

Motherson Sumi

-4.2

CEAT

3.6

Dislocated prices reflect near-term disruption

Expect demand recovery from 3QFY21 driven by festive season

While 1QFY21 is expected to be a wash-out, demand recovery should happen around the

festive season (Sep’20 onwards). Thus, we expect three opportunities to emerge from this

adversity: (a) possible reset of global automotive supply chain, (b) vendor consolidation

and M&As, and (c) shift from public to private transport. We do see value emerging across

our auto coverage universe as reflected by the substantial moderation in implied terminal

growth rates. We prefer stocks that offer higher visibility of demand recovery, better

competitive positioning, scope of higher operating leverage and strong balance sheet. EIM

and MSIL are our top large-caps picks. Among mid-caps, we prefer ENDU.

1QFY21 to be a wash-out…



“There is a good reason to

believe that people who

were availing shared

mobility because of

affordability will now avoid

public transport and

therefore look to buy a car.

But it is important to keep in

mind that affordability will

play a big factor.”

Vikas Jain, AVP, Head Unit

Sales, Hyundai India

India can gain from de-risking of

auto global supply chain from China

(Exports, USD b)

Auto Parts

Tyres

Total



With virtually zero sales in Apr’20 and continued weakness in May-Jun'20, we

expect 1QFY21 to be a complete wash-out. We estimate 1QFY21 volumes for

2Ws/PVs/CVs/tractors to decline 57%/55%/74%/38%.

Cost structure of OEMs is variable cost oriented due to higher outsourcing,

whereas component players have higher fixed cost structure, particularly for

companies with lesser dependence on the replacement market.

In OEMs, TTMT, EIM and AL have higher fixed cost. In components, MSS, MACA,

BOS and BHFC have higher operating leverage.

While balance sheet for auto OEMs (excl. TTMT) is strong with net cash, auto

ancillaries are a mixed bag with MSS, BHFC, CEAT and MACA having net debt.

…production ramp-up to take 3-6 months after lockdown is lifted…



Indian OEMs operate primarily out of nine states, of which Maharashtra, Tamil

Nadu, Haryana, Karnataka and Gujarat are major states. Within these states,

major clusters with developed ecosystems are in Pune, Delhi NCR, Chennai and

Bengaluru. All these major automotive clusters are listed as hotspots (Red

Zone), implying gradual normalization of production.

Import content in the Indian automotive industry should range between 15-20%

for key OEMs. Large part of these imports is from China (~27% of imports), EU

incl. the UK (~23%), South Korea (~10%), Japan (~9%) and the US (~7%).

While China is returning to normalcy in terms of production, we expect impact

on imports from EU and the US to be felt in May-Jun'20.

…while earliest demand recovery expected around festive season (Sep’20)



China

India

In our base case, we are expecting 'U' shaped demand recovery for 2Ws and PVs

from Sep-Oct'20 led by festive season demand pick-up. We estimate FY21E

volumes for 2Ws/PVs/CVs/Tractors to decline 10%/6%/13%/0%.

The pace of recovery would depend on several factors such as (a) time taken to

return to normalcy, (b) stimulus from the government, and (c) extent of

job/income losses.

In India, we see limited scope for auto-focused incentives, and hence, see low

probability of 'V' shaped recovery.

Jinesh Gandhi - Research analyst

(Jinesh@MotilalOswal.com); +91 22 6129 1524

Vipul Agrawal - Research analyst

(Vipul.Agrawal@MotilalOswal.com)

Investors are advised to refer through important disclosures made at the last page of the Research Report.

Motilal Oswal research is available on

www.motilaloswal.com/Institutional-Equities,

Bloomberg, Thomson Reuters, Factset and S&P Capital.

Automobiles

Opportunities in adversity – 3 prospects due to pandemic



Reset of automotive supply chain with de-risking from China:

China is one of

the critical suppliers in the global automotive supply chain with exports of

~USD80b (incl. tyres). COVID-19 would further influence the changing geo-

political equations and enhanced focus toward diversifying away from China.

We believe India can benefit from this shift though it needs to be competitive

and requires an enabling policy framework.

M&A opportunities as weaker players exit:

History suggests that such a crisis

could provide attractive opportunities, particularly in the component space, as

OEMs would avoid disruption by weeding out weaker suppliers.

Shift from public to private transports:

Initial response from countries like

China is changing consumer preference toward private transportation. We

believe this could be a transitory benefit even in India.

Framework for identifying winners



Owing to the several moving parts and uncertainties, we have designed a

framework to identify companies that are relatively better positioned v/s peers.

We evaluate OEMs

on four parameters – (a) pace of demand recovery, (b)

competitive intensity, (c) margin drivers, and (d) balance sheet strength – and

MSIL, EIM, BJAUT and ESC appear

best positioned on this framework.

For Auto Component players, we include two more parameters – global

exposure and risk of disruption. In the component space, our framework

identifies ENDU and CEAT as better positioned component players.

What are current valuations reflecting?



For all auto companies, FY21 is contributing <5% to the DCF-based fair value.

This compares with 20-58% correction in auto stock prices in CY20YTD.

We do see value emerging as is reflected in the substantially lower embedded

growth expectations with implied terminal growth of <5% for most companies.

When we compare damage to valuations (PB as proxy) as against damage to

business (RoE as proxy), EXID and BOS stand out favorably.

Valuation and view



The COVID-19 pandemic has not only put brakes on the initial signs of recovery

seen in 2Ws/PVs, but has also brought in uncertainty considering the several

unknowns associated with its impact. This potentially deepens the impact of BS6

related price increase on FY21 demand.

Valuations appear attractive across companies, but given the uncertain macro

environment and threat of the possible prolonged impact of Coronavirus, we

prefer stocks offering higher visibility of demand recovery, better competitive

positioning, scope of higher operating leverage and strong balance sheet.

EIM

and

MSIL

are our top large-caps picks. Among mid-caps, we prefer

ENDU.

7 May 2020

Automobiles

Story in charts

Exhibit 1: Cost structure for Auto/Ancillaries (% of sales)

RM Cost

Other Variable

4.1

5.4

7.6

Staff Cost

Other Fixed cost

Exhibit 2: Auto companies with high fixed cost (FY20E)

Fixed Cost + Net Interest

FY20E

MSS*

MACA*

BHFC*

TTMT*

BOSCH

CEAT

ENDU*

ESC

INR m

18,573

2,007

1,853

51,317

1,384

909

5,450

833

717

1,770

% of sales

35.2

30.0

21.9

20.1

17.2

16.1

14.7

14.3

13.8

12.4

Net Debt

(INR b)

70.8

12.2

11.3

591.7

-42.5

19.2

-32.5

-3.4

-8.5

2.8

ND/

EBITDA (x)

1.4

1.3

0.8

2.4

-2.9

2.9

-0.5

-0.3

-1.3

0.3

7.9

16.1

7.5

70.3

56.8

OEMs

Ancs

Source: Company, MOFSL

*Consolidated; Source: Company, MOFSL

Exhibit 3: India can gain from de-risking of auto global

supply chain from China (Exports, USD b)

Auto Parts

Tyres

Total

Exhibit 4: Reverse DCF suggests moderation in implied

terminal growth at current valuations

Implied Terminal growth (%)

China

India

Source: Company, MOFSL

Exhibit 5: Identifying companies with dislocation between business fundamentals and valuations

100

TTMT

EIM

AMRJ BHFC

HMCL

MSS

BJAUT

BOS

MSIL

EXID

ENDU

MACA

-60

-40

Premium

-20

Discount

PB Discount to 1SD below 10 yr avg

Source: MOFSL

7 May 2020

Automobiles

1QFY21 to be a wash-out…



The lockdown, which has stretched for over a month, would impact the entire

auto/auto component industry as all operations (factory as well as showrooms)

are shut.

Even if the lockdown is lifted in mid-May’20, some challenges would remain

such as (a) production ramp-up for OEMs/vendors due to unavailability of

migrant labor, and (b) impact on imports from EU and the US.

This should result in acute demand weakness in the near term as it would

come on the back of steep price increase due to the BS6 transition, which has

anyways kept demand under check in 1HFY21.

With zero sales in Apr’20 and continued weak volumes in May-Jun’20, we

expect 1QFY21 to be a wash-out, reflecting the worst of the COVID-19 impact.

We estimate 1QFY21 volumes for 2Ws/PVs/CVs/tractors to decline

57%/55%/74%/38%.

Cost structure of OEMs is more variable due to higher outsourcing of

components. On the other hand, component players have higher fixed cost

structure, particularly for companies with lesser dependence on the

replacement market.

In OEMs, TTMT (~19% of sales), EIM (~13.5%) and AL (~12%) have higher fixed

costs (as % of sales). In components, MSS (~34.5), MACA (~30%), BOS (~22%)

and BHFC (~21.7%) have higher operating leverage.

Balance sheet for auto OEMs remains strong with net cash at aggregate level.

The only exception is TTMT with net auto debt of ~INR163b/INR526 at

standalone/consolidated level. In the auto component segment, financial

gearing is mixed. Capex heavy/M&A focused businesses like MSS, BHFC, CEAT

and MACA have net debt balance sheets, whereas BOS, EXID, ENDU and AMRJ

have net cash balance sheets.

Exhibit 7: PV volumes to decline ~55% in 1QFY21

PVs

-10

-40

-70

FY19

FY20

FY21E

Exhibit 6: 2W volumes to decline ~57% in 1QFY21

2Ws

-10

-40

FY19

FY20

-70

-100

Exhibit 8: CV volumes to decline ~74.5% in 1QFY21

CVs

100

FY19

FY20

FY21E

Exhibit 9: Tractor volumes to decline ~38% in 1QFY21

Tractors

-20

-60

-100

FY19

FY20

FY21E

-50

-100

Source: Industry, MOFSL

7 May 2020

Automobiles

Exhibit 10: Cost structure for Auto/Auto Ancillaries (% of sales)

RM Cost

4.1

5.4

7.6

Other Variable

Staff Cost

Other Fixed cost

7.9

16.1

7.5

70.3

56.8

OEMs

Ancs

Source: Company, MOFSL

Exhibit 11: Auto OEMs/Component companies monthly fixed cost (FY20E)

Fixed Cost

FY20E

Bajaj Auto

Hero Honda

Maruti Suzuki

M&M

Tata Motors (S/A)

Tata Motors (Cons)

Ashok Leyland

Eicher Motors

TVS Motor

Escorts

Bharat Forge (S/A)

Exide Industries

Amara Raja

BOSCH

Endurance Tech (Consol)

Motherson Sumi

Mahindra CIE

CEAT

INR m

1,747

2,639

5,714

2,708

6,307

48,206

1,754

1,033

1,523

414

1,834

998

725

1,822

852

18,327

1,997

803

% of sales

7.1

7.3

17.4

19.2

12.3

13.6

11.3

8.6

21.7

11.9

22.7

14.7

34.7

29.8

14.2

Fixed Cost + Net Interest Net Debt

INR m

596

2,091

3,101

1,636

7,372

51,317

1,770

820

1,607

419

1,853

966

689

1,384

833

18,573

2,007

909

% of sales

2.4

8.7

4.9

4.4

20.3

20.1

12.4

10.8

11.9

8.7

21.9

11.5

12.3

17.2

14.3

35.2

16.1

INR b

-186.6

-61.4

-396.8

-32.5

166.6

591.7

2.8

-76.1

11.6

-8.5

11.3

-7.7

-0.8

-42.5

-3.4

70.8

12.2

19.2

Net Debt/

EBITDA (x)

-3.8

-1.5

-5.3

-0.5

17.3

2.4

0.3

-3.4

0.9

-1.3

0.8

-0.6

-0.1

-2.9

-0.3

1.4

1.3

2.9

Fixed cost = Staff + other Non-variable cost; Net Interest cost = Gross interest - Investment income

Source: MOFSL, Company

…production ramp-up to take 3-6 months after lockdown is lifted…



Restarting of manufacturing operations involve multiple challenges, not just at

the OEM level but for the entire supply chain as well, emanating from (a)

tighter and restricted operating guidelines, (b) availability of migrant labor, and

Indian OEMs operate primarily out of nine states, of which Maharashtra, Tamil

Nadu, Haryana, Karnataka and Gujarat are major states. Within these states,

major clusters with a developed ecosystem are in Pune, Delhi NCR, Chennai

and Bengaluru. All these major automotive clusters are listed as hotspots (Red

Zone) with large number of coronavirus infections.

Hence, we expect gradual resumption of production in these key clusters as

restricted movement would also delay migrant labor from returning to work.

Further, import content (including vendor imports) ranges between 15-20% for

key OEMs. Large part of these imports is from China (~27% of imports), EU incl.

the UK (~23%), South Korea (~10%), Japan (~9%) and the US (~7%).

7 May 2020

Automobiles



While China is returning to normalcy in terms of production, we expect impact

on imports from EU and the US to be felt in May-Jun’20.

Given the expectation of demand recovery in 2HFY21, we believe production

ramp-up is a manageable challenge for the industry.

Exhibit 12: Key automotive clusters of Delhi NCR, Pune, Chennai and Bengaluru are in Red Zone for coronavirus infection

Note: Clusters in red star denote hotspot for coronavirus infection; Source: Invest India, MOFSL

Exhibit 13: Break-up of origin for auto component imports

Italy

3.0

4.0

Singapore

5.0

France

2.0

Thailand

5.0

USA

7.0

Japan

9.0

South Korea

10.0

China

27.0

Germany

14.0

Source: ACMA, MOFSL

…while earliest demand recovery expected around festive

season (Sep’20)



While the lockdown is being lifted in a phased manner starting 20

Apr’20 , we

believe it would take at least 4-5 months for both demand and supply side to

normalize.

While demand was expected to be weak in 1HFY21 due to the impact of BS6

price increases (particularly for 2Ws/CVs), repercussions of the COVID-19

7 May 2020

Automobiles



outbreak would further deepen the pain in 1HFY21 as well as potentially delay

recovery in 2HFY21.

In our

Base case,

we are expecting ‘U’ shaped demand recovery for 2Ws and

PVs from Sep-Oct’20 led by festive season demand pick-up. In the base case,

we expect control of the pandemic and gradual recovery after initial shock of

the outbreak reduces. We estimate FY21 volumes for 2Ws/PVs/CVs/tractors to

decline 10%/6%/13%/0%.

In our

Bull case,

we could see a faster ‘V’ shaped recovery led by (a) relevant

stimulus packages by the government, (b) consumers preferring private

transport over public transport, and (c) benefit of lower interest rates/oil

prices.

In our

Bear case,

we are assuming longer time for the pandemic to come under

control. We expect deeper impact on economic activity in FY21. This in turn

would see demand for autos take a substantial step-down from the low base of

FY20.

The pace of recovery would be dependent on several factors including (a) time

taken for normalcy to return, (b) stimulus from the government, and (c) extent

of job/income losses.

If we read through the pace of recovery in countries that were ahead of the

curve in this pandemic (China, South Korea, etc.), the level of inquiries after

lifting up of lockdown has been encouraging. This is partly driven by consumers

preferring private transport over public transport as well as incentives offered

by the government for the purchase of a PV.

In India, we see limited scope of such incentives, and hence, see low

probability of a ‘V’ shaped recovery.

Exhibit 14: Our Base case assumes ‘U’ shaped recovery

Scenario

Assumption

Coronavirus controlled efficiently without reaching

stage 3 of community transmission.

Lockdown to be lifted from 3

May’20, except in

few hotspots and normalcy to return by

Aug/Sep'20.

Coronavirus controlled efficiently without reaching

stage 3.

Lockdown to be lifted from 3rd May’20, except in

few hotspots and normalcy to return by

Jul/Aug'20. Relevant stimulus incl. incentives for

autos.

Coronavirus control slower due to community

spread, with cure taking longer time.

Phased lockdown lifting beyond 3

May, with

hotspots remaining under lockdown till end-

Jun’20. Normalcy by 4QFY21.

Gr. Est (%)

2Ws

PVs

LCVs

M&HCVs

Tractors

2Ws

PVs

LCVs

M&HCVs

Tractors

2Ws

PVs

LCVs

M&HCVs

Tractors

FY21E

-10

-6

-14

-11

-4

-2

-10

-6

-20

-18

-30

-6

FY22E

Source: MOFSL

Base ('U'

shaped

recovery)

Bull ('V'

shaped

recovery)

Bear ('L'

shaped

recovery)

7 May 2020

Automobiles

Exhibit 15: 2W volumes to decline ~32% in 1HFY21 but grow

16% in 2HFY21

2Ws

17.6

Exhibit 16: PV volumes to decline ~26% in 1HFY21 but grow

17.5% in 2HFY21

PVs

FY19

4.4

-2.9

-22.9

-4.0 -0.2

FY20

FY21E

3.3

-3.7

-21.6

FY19

7.0

FY20

8.9

FY21E

27.5

6.2

-11.1

-7.4

-20.0

34.5

14.8

-9.7

-57.0

-6.2

-17.2

-15.2

-54.6

Source: Industry, MOFSL

Exhibit 17: CV volumes to decline ~50% in 1HFY21 but grow

30% in 2HFY21

CVs

48.1

26.1

2.9

-13.7

-74.5

Source: Industry, MOFSL

-4.6

-19.1

-1.8

FY19

FY20

FY21E

75.4

Exhibit 18: Tractor volumes to decline ~16% in 1HFY21 but

grow 22% in 2HFY21

Tractors

25.9

1.4

-10.7

8.3

-5.7

FY19

FY20

FY21E

41.8

19.5

7.5

-5.8 -8.6

-21.1

-35.4

-15.6

-47.6

-38.0

Source: Industry, MOFSL

Opportunities in adversity: Better prepared companies to come

out winning



‘Business as usual’ is not expected in the post COVID-19 world as there would

be some structural and transitory changes globally. This would open up few

opportunities for the companies that are well prepared. We list below three

opportunities which could open up for Indian companies.

Reset of automotive supply chain with de-risking from China:

China is one of

the critical suppliers in the global automotive supply chain with exports of

~USD80b (incl. tyres). Global sourcing teams have been evaluating de-risking of

the supply chain from China after heightened fears of the trade wars for the

last few years. COVID-19 would further influence the changing geo-political

equation and the enhanced focus toward diversification away from China (for

e.g. Japan has earmarked USD2.2b for shifting production from China). While

India needs to up its game to be competitive, an enabling policy framework is

needed to benefit from this shift. India auto component players should first

focus on capitalizing the import substitution opportunity by localizing imported

components and then pursue globalization of the same components once scale

is attained from domestic consumption.

M&A opportunities as weaker players exit:

Like the past crises, we expect

COVID-19 to result in severe pressure on weaker players in the global

automotive ecosystem. This would provide opportunity for prepared players to

either consolidate their position or enter new products/markets through M&A

7 May 2020

Automobiles



at reasonable valuations. History suggests that such a crisis could provide very

attractive opportunities, particularly in the component space, as OEMs would

like to avoid disruption by weeding out weaker suppliers.

Shift from public transport to private transports:

Initial response from

countries like China is changing consumer preference toward private

transportation post lifting of the lockdown. We believe this could be a

transitory benefit and would last till fear of the pandemic is fresh in the minds

of people. This trend would be witnessed, particularly in urban and semi-urban

markets for 2Ws (Entry, Executive and Scooter segment) and PVs (Entry and

Compact segment).

Exhibit 20: Over 60% of imported components are in

transmission and steering, engine and electricals

Transm. & Steering

7.4

6.4

9.8

8.9

4.72.2

29.9

Engine Comp.

Electricals

Suspen. & Braking

Body/Chassis

Exhibit 19: Imports form ~30% of total component

consumed in India, which can be localized in the first phase

Domestic (INR b)

Imports (INR b)

Imports (% of total)

30.1

23.1 24.0

29.2

33.9 33.3 32.9

31.3

29.3 29.5 29.9

1067

1237

360

2551 2899

376

1847 2191

1578

1619 1634 1503 1663

872 1197

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

Source: ACMA, MOFSL

829 907

497 669

745 772

906

Consumables

Interiors

17.0

13.6

Cooling sys.

Rubber comp.

Source: ACMA, MOFSL

Exhibit 21: China auto component (incl. tyres) exports at ~USD80b (Exports, USD b)

Auto Parts

Tyres

Total

China

India

Source: UN Comtrade, ACMA, MOFSL

Exhibit 22: With right policy support, India can gain share in the global auto supply chain

Source: ACMA, MOFSL

7 May 2020

Automobiles

Exhibit 23: Survey in China suggests increasing car purchase intention among consumers (not owning car) due to lack of trust

for public transportation

Source: IPSOS

Exhibit 24: China is offering incentives for the auto market, which can aid faster recovery

Source: PwC

Framework for identifying winners



Owing to the several moving parts and uncertainties, we have designed a

framework to identify companies that are relatively better positioned v/s

peers. The parameters selected for the objective analysis are different for

OEMs and component players. We would link outcome of this framework with

current valuations to select our top picks.

For OEMs, the four parameters to identify winners are (a) pace of demand

recovery, (b) competitive intensity, (c) margin drivers, and (d) balance sheet

strength. For component players, the parameters for analysis are (a) pace of

demand recovery, (b) global exposure, (c) risk of disruption, and (d) balance

sheet strength.

On the demand side, we expect recovery to be faster for tractors, followed by

PVs, 2Ws and CVs (in the same order). Within segments, apart from segmental

growth expectations, we analyze OEMs based on their product pipeline and

relative positioning under BS6, which would influence the pace of recovery for

OEMs. Our analysis suggests that EIM, MSIL and ESC are relatively better

positioned for faster recovery.

Competitive intensity analysis encompasses magnitude of pricing competition,

risk of new entrants and segmental trend changes. EIM is the best positioned

with the least competitive intensity in its segment.

7 May 2020

Automobiles



Margin drivers for OEMs analyzed include pricing actions, product mix changes,

Forex influence, cost cutting initiatives, fixed cost absorption, etc. EIM and

BJAUT seem to have favorable margin drivers for the next two years.

Balance sheets are fairly comfortable for most OEMs, with major ones having

net cash balance sheets, barring TTMT, TVSL and AL. However, for the purpose

of this analysis, we have tested OEMs for relative capex intensity, potential re-

capitalization of captive NBFCs, investments in subsidiaries, etc. MSIL, EIM,

BJAUT and ESC are best positioned here.

Summing up the above parameters, EIM is best positioned followed by MSIL in

Auto OEMs based on our framework.

For Auto Component players, we include two more parameters – global

exposure and risk of disruption. In the component space, our framework

identifies ENDU and CEAT as better positioned.

Exhibit 25: EIM and MSIL are relatively better placed as price inflation is lower in BS6

OEMs

BJAUT

HMCL

TVSL

EIM

MSIL

ESC

TTMT

Pace of demand

recovery

2.5

3.0

2.5

4.0

5.0

3.0

4.0

2.0

Competition

Intensity

3.0

2.0

2.5

5.0

4.0

3.5

3.0

2.5

Margin

drivers

4.0

3.0

3.5

4.0

2.5

3.0

2.0

Balance sheet

Strength

5.0

3.5

2.5

5.0

3.5

4.0

2.5

1.0

Overall

3.6

2.9

2.8

4.5

4.1

3.3

3.6

2.4

1.9

Source: MOFSL

Exhibit 26: ENDU & CEAT are better placed on Auto Comps; AMRJ/EXID also placed well

Ancs

AMRJ

EXID

CEAT

BOSCH

Bharat Forge

Endurance Tech

Motherson Sumi

Mahindra CIE

Pace of

demand

recovery

3.5

Global

Exposure

1.5

Risk of

disruption

1.5

2.5

3.5

Margin

drivers

3.0

2.5

2.0

3.0

4.0

3.0

Balance

sheet

Strength

3.5

2.5

Overall

3.3

3.4

3.6

3.3

2.6

3.8

3.0

2.5

Source: MOFSL

7 May 2020

Automobiles

Exhibit 27: Auto OEMs – Key drivers to watch out for

COMPANY

Bajaj Auto

CATALYST TO LOOK FORWARD TO

Entry level motorcycle could see faster recovery, especially

in rural markets

Benefit of favorable INR on exports (~47% of revenues)

Faster recovery in rural to benefit is Entry/Executive

segment motorcycle

CHALLENGES TO WATCH OUT FOR

Possible impact of risk averseness among NBFC on demand

Impact of weak oil prices on exports to Africa & other

markets

Possible impact of risk averseness among NBFC on demand

Likely increase in financial gearing for recapitalization of

NBFCs

Benefit of possible recovery in scooters in urban markets.

TVS Motor

Benefit of favourable INR on exports (~30% of volumes)

Good acceptance of BS6 products among customers

Eicher Motors

Possible impact of risk averseness among NBFC on demand

Likely increase in financial gearing for recapitalization of

NBFCs

Near term impact on demand as ~50% of demand comes

from non-salaried customers

Relatively higher fixed cost could result in op. deleverage if

volumes fail to recover

Hero MotoCorp

Maruti Suzuki

RE's product pipeline to dilute impact of slowdown in

discretionary spend

With stronghold in entry/compact segment, it would benefit

Impact of diesel exit under BS6

significantly from preference towards private transportation

Two new product launches expected in FY21.

Adverse impact of adverse JPYINR on imports

M&M

Tractors are least impacted from demand standpoint, which

Higher competitive intensity in mid-sized SUV segment

augurs well for MM

Limited price increase for diesel UVs under BS6

JLRs recovery in China could be faster than expected

Aggressive pricing on BS6 SUV to pressure on margins

Financial gearing to go up further in both JLR & India due to

weaker operating performance

Possible impact of risk averseness among NBFC on CV

demand

Possible impact of risk averseness among NBFC on demand

Construction equipment and railway business could take

longer time to recover

Source: MOFSL

Tata Motors

JLRs product pipeline is favorable, aiding faster recovery

Ashok Leyland

Escorts

Evolution of Kubota partnership could add to estimates

Ramp-up in LCVs and Exports will dilute impact of weak

M&HCV demand

Tractors are least impacted from demand standpoint

Exhibit 28: Auto Ancillaries – Key drivers to watch out for

Company

Bharat Forge

Replacement demand (40-45% of sales) is more resilient

& would recover faster

Market share gains from unorganized to continue, as

unorganized players will be severely impacted

Soft lead prices augurs well for margins

2W segment opportunity to realize in FY21 through EFI

and EV components

Content increase in CVs & diesel would dilute impact of

market share loss

Outperformance in India business to continue as ramp-up

of HMSI & TVSL business happens

Update on business win in 2W ABS

Strong order book gives visibility of faster recovery in

global business

Further consolidation in the global supply chain augurs

well for player like MSS

Soft raw material prices (rubber & crude derivatives)

augur well for margins

Catalyst to look forward to

Benefit of favorable INR on exports (~30% of volumes)

Challenges to watch out for

Downside risk in US Class 8 and Shale oil business

Operating deleverage especially since it had added

capacities recently in India and EU

Industrial business will take longer time to recover

EXID/ AMRJ

Bosch

Endurance Tech

Motherson Sumi

1HFY21 will fully reflect for possible market share loss in

CVs and lower diesel sales.

Higher import content for BS6 components to put

pressure on FY21 margins

EU business would take longer time to recover, though

impact would be diluted as Italian government would

bear 80% of employee cost during lockdown

Turnaround of US & Hungary plant would take longer

than expected

PKC business would see sharp decline in FY21

Operating deleverage especially since it has recently

added significant capacity

Source: MOFSL

CEAT

7 May 2020

Automobiles

What are current valuations reflecting?



The Auto sector has been an underperformer for the last 12 months as well as

in CY20 so far, with absolute decline of 31%/32% for the NSE Auto Index in 1-

year/CY20YTD as against the decline in the Nifty 50 of 18%/24%.

This is a reflection of weakening volume outlook for the sector since the last 15

months or so. While the auto sector was primed for a comeback post the BS6

transition, the coronavirus outbreak has resulted in further deterioration in the

near-term volume outlook for the sector and pushed back recovery.

For all auto companies under our coverage, FY21 is contributing <5% to the

DCF-based fair value. This compares with 20-58% correction in the auto stock

prices in CY20YTD, implying either over-reaction to the problem or structural

and long-drawn impact of the pandemic.

After sharp correction in stock prices, we do see value emerging across our

auto coverage universe as reflected in substantially lower embedded growth

expectations.

Our reverse DCF analysis suggests substantial moderation in the implied

terminal growth rates of our auto coverage. Barring MSIL, all OEMs have

implied terminal growth of <5% (MSIL is at 5.4%). In the Auto Component

space, implied terminal growth is <4% for all companies except BOS and AMRJ.

When we compare FY22E P/B based valuations vis-à-vis FY22E RoEs, all the

stocks under our coverage are trading well below 10-year average P/B as

FY22E RoEs are well below 10-year average (except for ESC). Interestingly,

barring MSIL, ESC and CEAT, all stocks are trading below 1 standard deviation

below 10-year average P/B.

When we compare damage to valuations (P/B as proxy) as against damage to

business (RoE as proxy), EXID and BOS stand out favorably with steep discount

on P/B basis (to 1SD below average P/B) but limited dilution in RoEs (<15%

lower than 5-year/10-year average RoEs).

Exhibit 29: Reverse DCF suggests moderation in implied terminal growth at current valuations | Barring BJAUT and HMCL,

FY21 contributes <5% to DCF-based fair value

Bajaj Auto

Hero MotoCorp

TVS Motor

Eicher Motors

Maruti

M&M (incl MVML)

Tata Motors

Ashok Leyland

Escorts

Bharat Forge

Exide Industries

Amara Raja

BOSCH

Endurance Tech

Motherson Sumi

CEAT

Legend

Implied Terminal growth (%)

4.1

4.9

4.0

3.2

4.6

3.6

-0.8

1.5

4.8

2.0

4.1

6.1

7.9

4.1

-4.2

3.6

Implied Terminal Growth <3%

Implied Terminal Growth of 3-6%

Implied Terminal Growth of >6%

FY21 contribution to DCF (%)

5.5

5.2

2.3

2.9

0.5

3.5

-14.6

0.2

1.9

2.8

1.9

3.4

2.9

3.3

4.5

-9.8

Source: Company, MOFSL

7 May 2020

Automobiles

Exhibit 30: Identifying companies with dislocation between business fundamentals and valuations…

100

TTMT

EIM

AMRJ

BHFC

HMCL

MSS

BJAUT

BOS

EXID

ENDU

MACA

MSIL

-60

-40

Premium

-20

Discount

PB Discount to 1SD below 10 yr avg

Source: MOFSL

Exhibit 31: …by comparing discount to current P/B and RoEs vis-à-vis 10-year LPA

PB (x)

Avg RoE (%)

FY22E

10 Yr Avg -1SD PE (x)

FY22E

5 yr

10 Yr

Bajaj Auto

2.7

5.0

3.8

20.9

24.9

34.4

Hero MotoCorp

2.7

6.4

4.4

21.3

29.6

39.0

TVS Motor

3.2

4.8

2.1

18.1

21.7

21.4

Eicher Motors

2.8

6.4

3.0

18.6

28.8

25.9

Maruti Suzuki

2.8

3.4

2.1

13.6

15.9

14.8

M&M

0.5

2.9

2.3

9.0

12.6

17.4

Tata Motors

0.6

1.8

1.3

2.3

11.0

24.6

Ashok Leyland

1.6

2.9

1.6

9.5

17.9

15.4

Escorts

1.4

1.2

0.3

12.9

15.1

11.8

Bharat Forge

2.0

4.2

2.6

12.8

16.6

17.7

Exide Ind

1.8

3.1

2.5

11.8

12.9

14.0

Amara Raja

2.0

3.9

2.3

15.2

18.0

23.2

Bosch

3.2

5.7

4.3

14.2

15.4

17.5

Endurance Tech

2.5

5.5

4.3

16.4

19.8

Motherson Sumi

1.8

4.9

3.1

13.5

17.7

20.9

CEAT

1.0

1.3

0.6

9.6

11.7

15.0

Mahindra CIE

0.6

2.6

1.6

8.5

8.9

8.3

>25% disc. to 1SD below 10 Yr avg.

<15% lower than 5 & 10 Yr avg

Legend

0-25% disc. to 1SD below 10 Yr avg.

15-25% lower than 5 & 10 Yr avg

At premium to 1SD below 10 Yr avg.

>25% lower than 5 & 10 Yr avg

FY22E

13.6

13.0

18.6

16.3

20.2

10.6

24.5

17.5

11.4

16.5

14.9

13.7

23.6

16.2

14.2

10.4

7.8

PE (x)

10 Yr Avg

16.6

17.8

23.8

25.4

22.8

17.5

12.1

28.3

9.9

25.8

22.6

19.9

35.0

30.1

27.9

13.1

29.5

-1SD PE (x)

14.5

15.7

10.6

16.6

14.1

12.7

4.4

7.5

5.8

17.2

19.1

10.4

24.4

24.7

18.1

4.4

17.4

Source: Bloomberg, MOFSL

Valuation and view



The COVID-19 outbreak has not only put brake on the initial signs of recovery

seen in 2Ws/PVs, but has also brought in uncertainty considering the several

unknowns associated with the impact of Coronavirus. This potentially deepens

the impact of BS6 related price increase on FY21 demand.

Pre-COVID-19, we were expecting recovery to be faster for Tractors (no impact

of BS6), PVs (considering lesser price inflation due to BS6), followed by 2Ws

and CVs. However, post-Coronavirus, we expect 2Ws to also see recovery

along with PVs. Our view largely remains unchanged for Tractors (limited

impact of Coronavirus) and CVs (excess capacity absorption to get further

pushed back).

7 May 2020

Automobiles



On the other hand, 2Ws/CVs are likely to be the most impacted due to very

high cost inflation. The impact on CVs would be determined by economic

viability and freight availability. 2Ws could see pre-buying and consequent

weakness. However, both these segments could see possible stimulus in the

form of GST cut (for 2Ws) and scrappage policy (for CVs).

We had lowered our FY21E EPS estimates in the 4QFY20 preview for all

companies under our coverage, with a double-digit cut from 10% to 55%, with

the highest cut in EPS for companies with high operating leverage and/or high

global exposure. These estimates would see further changes as more clarity

emerges on impact of the Coronavirus.

Valuations appear attractive across companies, but given the uncertain macro

environment and threat of possible prolonged impact of Coronavirus, we

prefer stocks offering higher visibility of demand recovery, better competitive

positioning, scope of higher operating leverage and strong balance sheet.

EIM and MSIL are our top large-caps picks. Among mid-caps, we prefer ENDU.

We see deep value in global plays like TTMT and MSS as implied terminal

growth is negative for both these companies. Between these two names, we

prefer MSS due to better competitive positioning, declining capex requirement

and lesser financial gearing.

We also see high margin of safety in MM as embedded growth expectations

are low. While near-term catalysts for re-rating are not visible currently,

change in the senior management could be the turning point.

In mainstream 2Ws, we have Neutral rating on all the three OEMs due to

higher cost inflation for BS6 compliance, changing segmental trends and high

competitive intensity. Within mainstream 2Ws, BJAUT is relatively better

placed due to diversified revenue stream (exports and 3Ws), strong premium

motorcycle portfolio, possible first mover advantage in e-scooters and benefits

of favorable Forex.

EBITDA Margins (%)

FY20E

FY21E

FY22E

16.7

16.9

17.1

14.4

12.8

13.8

8.4

8.6

9.4

24.9

23.6

25.1

9.8

9.0

11.6

13.7

13.5

14.6

9.6

9.2

13.1

6.3

5.9

8.5

11.3

11.7

12.4

16.6

13.7

16.1

15.3

16.1

7.8

12.2

9.9

15.6

13.4

15.7

14.5

14.7

7.8

10.3

10.7

17.3

13.6

16.0

15.8

15.4

9.8

12.1

11.5

EPS (INR)

FY21E

167.2

126.0

11.5

679.9

166.9

27.8

-23.3

0.9

50.1

12.8

9.2

34.6

350.6

32.7

3.1

7.3

51.9

Exhibit 32: Key Operating Indicators

Auto OEM's

Bajaj Auto

Hero MotoCorp

TVS Motor

Eicher Motors

Maruti Suzuki

M&M

Tata Motors

Ashok Leyland

Escorts

Auto Ancillaries

Bharat Forge

Exide Industries

Amara Raja

BOSCH

Endurance Tech

Motherson Sumi

Mahindra CIE

CEAT

FY20E

-7.7

-18.0

-16.6

-15.8

-16.1

-17.2

-35.3

-36.5

-7.0

-15.7

-5.2

-1.1

-21.4

-7.1

-0.3

-1.5

-2.8

Vol/Rev Gr (%)

FY21E

-8.3

-12.0

-9.9

-4.2

-5.8

-4.2

-12.7

0.2

2.0

-8.5

5.2

5.1

0.8

-1.4

-2.6

-9.2

5.7

FY22E

10.4

11.1

13.2

15.3

18.2

9.7

19.2

19.7

12.0

13.7

10.7

11.5

11.3

13.9

14.5

10.5

13.5

FY20E

178.2

154.1

12.8

703.1

191.8

29.5

-14.9

1.1

53.5

15.2

9.6

37.7

403.1

39.7

3.7

9.4

47.6

FY22E

183.9

151.8

16.6

878.0

250.6

32.8

3.2

2.7

62.6

17.1

10.4

39.4

424.3

40.5

5.7

11.6

75.2

Source: MOFSL

7 May 2020

Automobiles

Exhibit 33: Comparative Valuations

Auto OEM's

Bajaj Auto

Hero MotoCorp

TVS Motor

Eicher Motors

Maruti Suzuki

M&M

Tata Motors

Ashok Leyland

Escorts

Auto Ancillaries

Bharat Forge

Exide Industries

Amara Raja

BOSCH

Endurance Tech

Motherson Sumi

Mahindra CIE

CEAT

CMP

(INR)

2,406

1,998

321

14,004

4,749

401

750

Rating

Neutral

Buy

Neutral

P/E (x)

EV/EBITDA (x)

PB (x)

RoE (%)

Div Yield (%) EPS CAGR (%)

(INR) FY21E FY22E FY21E FY22E FY21E FY22E FY21E FY22E FY21E FY22E FY20-22E

2,382 14.4 13.1

9.8

8.3

2.9

2.6

20.6 20.9

3.1

3.5

1.6

2,072 15.9 13.2

9.4

7.7

2.9

2.8

18.2 21.3

4.8

5.3

-0.8

297

27.9 19.4 11.9

9.3

3.8

3.3

14.0 18.1

1.2

13.7

17,200 20.6 15.9 17.3 13.8

3.2

2.8

16.6 18.6

0.9

1.0

11.7

6,280 28.5 19.0 16.0 10.3

2.8

2.7

9.6

13.6

1.9

2.2

14.3

513

14.4 12.2

8.8

7.3

0.6

8.0

9.0

2.5

16.1

-3.5 25.9

4.8

2.8

0.6

-15.4 2.3

0.0

LTP

51.6 16.9 14.2

8.0

1.6

3.1

9.5

2.2

3.3

58.4

654

15.0 12.0 10.4

8.3

1.6

1.5

13.1 12.9

0.5

-3.0

21.8

16.0

16.1

28.2

18.6

24.4

14.3

14.4

16.3

14.1

14.2

23.3

15.0

13.1

9.0

9.9

12.6

8.8

8.4

19.9

7.9

5.9

6.9

7.3

10.0

7.9

7.2

15.9

6.4

3.7

5.0

5.9

2.2

1.8

2.3

3.5

2.6

1.9

0.8

1.0

2.0

1.7

2.0

3.1

2.3

1.7

0.7

0.9

10.2

11.3

14.8

13.0

14.7

7.8

5.8

7.0

12.8

11.8

15.2

14.2

16.4

13.5

8.5

9.6

2.2

1.6

0.7

1.3

1.1

0.0

1.7

2.2

1.8

0.9

1.7

2.1

0.0

1.7

6.2

4.2

2.2

2.6

0.9

24.0

10.8

25.8

Source: MOFSL

278

Buy

342

147

Buy

177

557

Buy

630

9,882 Neutral 10,607

607

Buy

810

Buy

104

Buy

116

748

Buy

903

7 May 2020

Automobiles

NOTES

7 May 2020

Automobiles

Explanation of Investment Rating

Investment Rating

BUY

SELL

NEUTRAL

UNDER REVIEW

NOT RATED

Expected return (over 12-month)

>=15%

< - 10%

> - 10 % to 15%

Rating may undergo a change

We have forward looking estimates for the stock but we refrain from assigning recommendation

*In

case the recommendation given by the Research Analyst is inconsistent with the investment rating legend for a continuous period of 30 days, the Research Analyst shall within following 30 days take appropriate measures to make the recommendation

consistent with the investment rating legend.

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Analyst(s) who compile this report is/are not located in Hong Kong & are not conducting Research Analysis in Hong Kong.

For U.S:

Motilal Oswal Financial Services Limited (MOFSL) is not a registered broker - dealer under the U.S. Securities Exchange Act of 1934, as amended (the"1934 act") and under applicable state laws in the United States. In addition MOFSL is not a registered

investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act" and together with the 1934 Act, the "Acts), and under applicable state laws in the United States. Accordingly, in the absence of specific exemption under the

Acts, any brokerage and investment services provided by MOFSL, including the products and services described herein are not available to or intended for U.S. persons. This report is intended for distribution only to "Major Institutional Investors" as defined by

Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional investors"). This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment

activity to which this document relates is only available to major institutional investors and will be engaged in only with major institutional investors. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934,

as amended (the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., MOFSL has entered into a chaperoning agreement with a U.S.

registered broker-dealer, Motilal Oswal Securities International Private Limited. ("MOSIPL"). Any business interaction pursuant to this report will have to be executed within the provisions of this chaperoning agreement.

The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, MOSIPL, and therefore, may not be subject to NASD

rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account.

For Singapore:

In Singapore, this report is being distributed by Motilal Oswal Capital Markets Singapore Pte Ltd (“MOCMSPL”) (Co.Reg. NO. 201129401Z) which is a holder of a capital markets services license and an exempt financial adviser in Singapore,

as per the approved agreement under Paragraph 9 of Third Schedule of Securities and Futures Act (CAP 289) and Paragraph 11 of First Schedule of Financial Advisors Act (CAP 110) provided to MOCMSPL by Monetary Authority of Singapore. Persons in

Singapore should contact MOCMSPL in respect of any matter arising from, or in connection with this report/publication/communication. This report is distributed solely to persons who qualify as “Institutional Investors”, of which some of whom may consist of

"accredited" institutional investors as defined in section 4A(1) of the Securities and Futures Act, Chapter 289 of Singapore (“the SFA”). Accordingly, if a Singapore person is not or ceases to be such an institutional investor, such Singapore Person must

immediately discontinue any use of this Report and inform MOCMSPL.

Disclaimer:

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. This report and information herein is solely for informational purpose and may 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. 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. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and

should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. Certain transactions -including those involving futures, options, another derivative

products as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. No representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of the information and opinions contained

in this document. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. This information is subject to change without

any prior notice. The Company reserves the right to make modifications and alternations to this statement as may be required from time to time without any prior approval. MOFSL, its associates, their directors and the employees may from time to time, effect or

have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any

company referred to in this report. Each of these entities functions as a separate, distinct and independent of each other. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of information that

is already available in publicly accessible media or developed through analysis of MOFSL. The views expressed are those of the analyst, and the Company may or may not subscribe to all the views expressed therein. This document is being supplied to you

solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. 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 MOFSL 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. Neither the Firm, not its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use

of the information.

The person accessing this information specifically agrees to exempt MOFSL or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOFSL or any of its affiliates or employees

responsible for any such misuse and further agrees to hold MOFSL or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays.

Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022 71934200/ 022-71934263; Website

www.motilaloswal.com.

CIN No.: L67190MH2005PLC153397.Correspondence Office Address: Palm Spring Centre, 2nd Floor, Palm Court Complex, New Link Road, Malad(West), Mumbai- 400 064. Tel No: 022 7188 1000.

Registration Nos.: Motilal Oswal Financial Services Limited (MOFSL)*: INZ000158836(BSE/NSE/MCX/NCDEX); CDSL and NSDL: IN-DP-16-2015; Research Analyst: INH000000412. AMFI: ARN - 146822; Investment Adviser: INA000007100; Insurance

Corporate Agent: CA0579 ;PMS:INP000006712. Motilal Oswal Asset Management Company Ltd. (MOAMC): PMS (Registration No.: INP000000670); PMS and Mutual Funds are offered through MOAMC which is group company of MOFSL. Motilal Oswal Wealth

Management Ltd. (MOWML): PMS (Registration No.: INP000004409) is offered through MOWML, which is a group company of MOFSL. Motilal Oswal Finan cial Services Limited is a distributor of Mutual Funds, PMS, Fixed Deposit, Bond, NCDs,Insurance

Products and IPOs.Real Estate is offered through Motilal Oswal Real Estate Investment Advisors II Pvt. Ltd. which is a group company of MOFSL. Private Equity is offered through Motilal Oswal Private Equity Investment Advisors Pvt. Ltd which is a group

company of MOFSL. Research & Advisory services is backed by proper research. Please read the Risk Disclosure Document prescribed by the Stock Exchanges carefully before investing. There is no assurance or guarantee of the returns. Investment in

securities market is subject to market risk, read all the related documents carefully before investing. Details of Compliance Officer: Name: Neeraj Agarwal, Email ID: na@motil aloswal.com, Contact No.:022-71881085.

* MOSL has been amalgamated with Motilal Oswal Financial Services Limited (MOFSL) w.e.f August 21, 2018 pursuant to order dated July 30, 2018 issued by Hon'ble National Company Law Tribunal, Mumbai Bench.

7 May 2020