Sector Update

Automobiles
Weak quarter, but performance improves sequentially

As anticipated, Q3FY2020 was a weak quarter for automobile

Q3FY2020 Results Review
companies with the universe’ (ex-TAMO) revenue and net profit
Sector: Automobiles falling by 6% and 10% y-o-y, respectively. However, Q3 performance
was much better as compared to Q2FY2020, where the automobile
Sector View: Neutral universe topline and net profit fell by 15% and 17%, respectively.
Automotive OEM companies reported topline drop of 5% yoy (driven
by drop in the volumes) while the auto ancillary companies topline
dipped by 7% yoy (dragged by weak OEM demand and weakness in
Our active coverage universe overseas markets namely Europe and USA). Automobile companies
CMP PT
held onto the margins, reporting OPM of 12.4% in Q3FY2020 as
Companies
(Rs)
Reco.
(Rs) compared to 12.2% in Q3FY2019. While auto companies had the
benefit of lower commodity prices, it was largely offset by higher
Maruti Suzuki 6,755 Hold 7,500 discounting and negative operating leverage because of weak
Hero Motocorp 2,240 Hold 2,750 demand. OEM companies reported better margin performance with
Bajaj Auto 3,062 Buy 3,670
50 bps yoy improvement (driven by cost control measures) while
the auto ancillary companies margins dropped 60 bps yoy due to
TVS Motors 446 Hold 485
pricing pressures from OEM. The decline in other income of select
M&M @ 525 Buy 665 companies (Maruti Suzuki, M&M and Bajaj Auto) due to lower yields
Ashok Leyland 84 Hold 90 on investments led to the auto universe net profit falling by 10%
y-o-y. Given the better operating performance; OEM’s reported lower
Apollo Tyres # 158 Buy 200
decline of 7% yoy while the auto ancillary companies reported sharp
Greaves Cotton 140 Hold 155 21% drop in profitability.
UR - Under Review, @ MM+MVML
Outlook:
BS6 transition to impact volumes in the near term; Expect recovery
from H2FY2021: Automotive companies, particularly PV and 2W
players, started to introduce BS6 variants in the market from January
Price chart 2020 to ensure smooth transition to BS6 norms. Auto companies would
stop production of BS4 vehicles and completely switch to only BS6
120
110
production by the end of February 2020. Transition to BS6 norms would
100 entail huge cost increases (10-12% hike) and would keep automotive
90 volumes under pressure in the next three to four quarters. We expect
80 recovery in volumes from H2FY2021 with the advent of the festive
70
season and the transition impact of BS6 getting over by then. Huge
60
infrastructure investments coupled with improving rural economy (due
Feb-19

Feb-20
Jun-19

Oct-19

to strong rabi output) are likely to improve economic growth, resulting in

Nifty Nifty Auto sustained recovery in automotive volumes. Moreover, pent-up demand
(auto volumes have been under pressure since H2FY2019) and an
improved financing situation are expected to lead to recovery for the
sector.
Valuation
Automotive volumes are expected to remain under pressure in the near
term given the weak economic growth and transition to BS6 emission
norms w.e.f. April 1, 2020. The Nifty Auto Index has been sluggish
with marginal 4% drop in the past three months as compared to flat
performance of the benchmark Nifty. We retain our Neutral view on
the sector. In the OEM space, we like M&M (due to improved volume
outlook for tractors and new launches in the auto segment) and Bajaj
Auto (market share gains due to new launches and healthy growth
in exports). In the auto ancillary space, we like Balkrishna Industries
(due to healthy demand outlook in key markets due to easing of trade
tensions and favourable weather conditions) and Apollo Tyres (due to
demand recovery in India and ramp up of European operations).
Coronavirus impact: Most automotive OEM’s (except Tata Motors) have
not felt the impact of the fallout of coronavirus in China (certain auto
components players like Bosch have manufacturing plants in China)
on their production so far. OEM’s have inventory for about a month
and have stated that they need to monitor the situation in China for
the next 10-15 days. If production in China is impacted beyond the next
two weeks, the production of automotive companies in India could also

February 20, 2020 13

 Sector Update
be impacted. Tata Motors which has manufacturing presence in China has stated that JLR volumes would be
impacted in Q4FY20. Also, the outbreak of the virus has led to the softening of global commodity prices such
as lead (beneficial for Exide Industries) and crude prices (beneficial for tyre players such as Apollo Tyres and
Balkrishna Industries).
Scrappage policy would provide boost to the sector: The government is working on a scrappage policy to
revive the automotive sector. If adequate incentives are provided to replace old vehicles with new ones, it
could result in a significant jump in automotive demand.
Key risks: 1) Prolonged weakness in demand. 2) Increased discounting adopted during transition from BS-IV to
BS-VI norms would impact performance.
Preferred picks: M&M, Bajaj Auto, Balkrishna Industries, Exide Industries and Apollo Tyres
Leaders in Q3FY2020: Hero MotoCorp, Bajaj Auto and Exide Industries
Laggards in Q3FY2020: Ashok Leyland, M&M and Apollo Tyres

Q3FY2020 result snapshot

Sales (Rs cr) EBIDTA margins (%) PAT (Rs cr)
Particulars Q3 Q3 YoY QoQ Q3 Q3 YoY QoQ Q3 Q3 YoY QoQ
FY20 FY19 % % FY20 FY19 bps bps FY20 FY19 % %
Coverage
Maruti Suzuki 20,706.8 19,668.3 5.3 21.9 10.2 9.8 33.3 69.5 1,564.8 1,489.3 5.1 15.2
Hero Motocorp 6,996.7 7,864.8 -11.0 -7.6 14.8 14.0 80.2 30.5 880.4 769.1 14.5 -4.3
Bajaj Auto 7,639.7 7,435.8 2.7 -0.9 17.9 16.3 159.0 131.4 1,261.6 1,101.9 14.5 -10.0
TVS Motors 4,125.5 4,664.0 -11.5 -5.1 8.8 8.1 75.0 2.1 197.1 178.4 10.5 10.1
M&M # 12,120.3 12,892.5 -6.0 10.8 14.8 13.2 155 66.8 980.7 1,476.0 -33.6 -27.6
Ashok Leyland 4,015.7 6,325.2 -36.5 2.2 5.6 10.3 -466.4 -21.0 29.9 387.9 -92.3 -71.1
Apollo Tyres @ 4,399.7 4,718.4 -6.8 10.4 12.1 11.2 94.9 128.8 173.9 258.0 -32.6 109.3
Greaves Cotton 494.7 506.5 -2.3 0.9 15.6 13.9 167.0 353.1 49.3 47.7 3.4 22.6
Soft Coverage:
Tata Motors @ 71,676.1 76,915.9 -6.8 9.5 10.0 7.7 229.7 -90.3 1,739.4 1,021.5 70.3 NA
Eicher Motors @ 2,371.0 2,341.1 1.3 8.1 25.0 29.0 -404.7 28.5 498.7 533.0 -6.4 -12.9
Exide Industries 2,411.5 2,496.8 -3.4 -7.6 13.3 12.5 74.6 -80.2 217.6 155.0 40.4 -8.3
Bharat Forge 1,076.7 1,692.5 -36.4 -14.5 21.9 28.8 -689.3 -353.8 127.8 271.0 -52.8 -47.8
Ceat @ 1,761.8 1,729.8 1.9 4.2 10.4 8.2 215.8 32.7 53.0 52.8 0.5 18.4
Minda Industries @* 1,326.8 1,470.1 -9.7 -2.4 12.3 12.3 3.9 42.4 49.9 69.4 -28.0 0.9
Sundram Fasteners 692.8 1,018.8 -32.0 -9.7 16.8 19.0 -220.2 -123.8 103.0 111.5 -7.6 45.0
Endurance 1,640.5 1,813.0 -9.5 -7.4 15.9 14.0 192.5 -55.3 124.0 117.4 5.7 -26.6
Technologies @
Motherson Sumi @* 15,661.1 16,473.0 -4.9 -1.7 7.9 8.5 -56.8 -39.2 270.5 389.1 -30.5 -29.7
GNA Axles 214.1 246.3 -13.0 -16.3 11.2 15.8 -463.7 -462.7 7.6 18.0 -57.4 -65.7
Escorts 1,633.4 1,655.1 -1.3 23.4 13.0 12.1 88.1 342.3 153.1 129.2 18.5 34.5
Suprajit Engineering @ 412.3 405.6 1.6 3.5 12.1 15.0 -280.8 -185.3 31.2 39.2 -20.4 -30.6
Lumax Auto 287.0 291.8 -1.7 -2.3 8.3 8.9 -61.3 -103.4 11.6 15.2 -23.6 -44.3
Technologies @
Alicon Castalloy @ 226.9 267.7 -15.2 -14.8 14.0 12.9 110.5 98.1 8.4 11.0 -23.0 -9.9
Balkrishna Industries 1,183.5 1,196.6 -1.1 6.9 30.8 24.4 640.3 338.7 220.7 144.7 52.5 -24.2
Auto Universe 163,074.4 174,089.5 -6.3 6.9 11.3 10.2 110.9 -24.1 8,754.4 8,785.9 -0.4 17.3
Auto universe (ex 91,398.4 97,173.6 -5.9 4.8 12.4 12.2 16.0 29.9 7,015.0 7,764.4 -9.7 -9.1
TAMO)
Source: Company; Sharekhan Research # MM+MVML ; @ Consolidated; @* not comparable due to acquisition;

February 20, 2020 14

 Sector Update
Valuations
EPS (Rs) P/E (X) Price Target
Companies CMP Reco
FY19 FY20E FY21E FY19 FY20E FY21E (Rs)

Coverage
Maruti Suzuki 6,755 248.3 205.1 242.3 27.2 32.9 27.9 Hold 7,500
Hero Motocorp 2,240 169.5 173.3 167.3 13.2 12.9 13.4 Hold 2,750
Bajaj Auto 3,062 149.8 174.9 186.3 20.4 17.5 16.4 Buy 3,670
TVS Motors $ 446 14.1 14.5 15.8 29.4 28.6 26.3 Hold 485
M&M @ $ 525 43.6 34.1 31.7 6.8 8.7 9.3 Buy 665
Ashok Leyland 84 7.0 2.0 1.9 12.0 42.0 44.2 Hold 90
Apollo Tyres # 158 15.4 10.2 14.4 10.3 15.5 11.0 Buy 200
Greaves Cotton 140 7.5 7.2 7.7 18.7 19.4 18.2 Hold 155
Soft Coverage:
Eicher Motors # 18,845 807.4 764.5 870.3 23.3 24.7 21.7 Not Under Coverage
Balkrishna Industries 1,266 40.5 50.0 59.5 31.3 25.3 21.3 Positive
Exide Industries $ 178 8.7 10.0 10.6 15.6 13.6 12.8 Positive
Sundram Fasteners # 450 21.8 16.5 16.5 20.6 27.3 27.3 Neutral
GNA Axles 234 30.7 26.5 22.6 7.6 8.8 10.4 Book Out
Lumax Auto Tech# 107 9.6 8.3 8.6 11.1 12.9 12.4 Neutral
Tata Motors# * 158 -2.9 -4.6 8.7 NA NA 18.2 Not Under Coverage
Tata Motors- DVR #* 65 -2.9 -4.6 8.7 NA NA 7.5 Not Under Coverage
Alicon Castalloy Ltd. # 362 39.6 26.3 38.9 9.1 13.8 9.3 Positive
Mayur Uniquoters 275 19.7 17.0 19.9 14.0 16.2 13.8 Positive
Source: Company; Sharekhan Research
@-MM & MVML; #- Consolidated;*FY19 EPS adjusted for impairment loss; $ core business valuation

February 20, 2020 15

 Sector Update
Revision in earnings estimates
Current Previous Target
Company Name Change in Estimate Reasoning
Reco Reco Price
Maruti Suzuki Downwards To factor in weaker-than-anticipated results and Hold Hold 7,500
lower realisations due to exit from the diesel
segment, we have cut our FY2020 and FY2021
estimates by 7%.
Hero MotoCorp Maintained Hero’s results were ahead of estimates, driven Hold Hold 2,750
by better-than-expected margin performance. We
have broadly retained our earnings estimates.
Bajaj Auto Upwards BAL is expected to continue outpacing the Buy Buy 3,670
industry’s growth, driven by launch of new
products with additional features and robust
export growth. Given the better-than-anticipated
margin performance in Q3FY2020, we have
marginally raised our FY2021 and FY2022
estimates by 3%.
TVS Motors Upwards The 2W industry is expected to recover from Reduce Hold 485
H2FY2021 post the transition to BS6 emission
norms. Moreover, sustained cost-control measures
and improving localisation levels would enable
TVSM to offset cost pressures on account of BS6
norms. We expect TVSM margin improvement to
sustain. We have raised our FY2020 and FY2021
estimates due to better-than-expected Q3 results
and rollover our multiple on FY2022 earnings.
M&M Downwards New launches in the automotive segment would Buy Buy 665
boost automotive sales volumes. Moreover, with
higher rabi sowing and water reservoir levels,
M&M expects the tractor industry to return to the
growth trajectory and expects volumes to rise by
5% in FY2021. Given the impact of transition to
BS6 norms, we have cut our FY2020 and FY2021
estimates by 6%.
Ashok Leyland Downwards Domestic MHCV demand is expected to remain Hold Hold 90
under pressure over the next 3 to 4 quarters due
to subdued economic growth and cost increases
due to BS6 transition. Demand revival would take
time and is expected to recover from H2FY2021.
Given weak Q3 results and volume pressures
in the near term, we have cut our FY2020 and
FY2021 estimates.
Apollo Tyres Maintained We have retained our FY2021 estimates given the Hold Buy 200
in-line operating performance in Q3FY2020. We
have introduced FY2022 earnings in this note and
expect strong 28% earnings CAGR over FY2020-
FY2022, driven by recovery in domestic demand
and margin improvement. We rollover our target
multiple of 12x to FY2022 earnings and upgrade
our recommendation to Buy.
Greaves Cotton Upwards Volumes are expected to be under pressure as Hold Hold 155
3W diesel engines fall post steep cost increases.
Drop in diesel 3W volumes would offset the strong
growth in electric scooters and aftermarkets
and we expect flat volumes for FY2021. Given
better-than-expected 3QFY2020 results and new
product launches in the electric scooter segment,
we have increased our FY2021 estimates by
about 7%.

February 20, 2020 16

 Sector Update
Revision in earnings estimates
Current Previous Target
Company Name Change in Estimate Reasoning
Reco Reco Price
Balkrishna Industries Upwards Balkrishna surprised positively with strong margin Positive Positive 1469
improvement in Q3FY2020. As per management,
Q3 margins are sustainable given favourable
raw-material prices and captive sourcing of
carbon black. To factor margin improvement and
sales of carbon black outside (second phase of
carbon black plant would create certain surplus
capacity), we have raised our FY2021 and
FY2022 estimates by ~20%.
Alicon Castalloy Maintained Strong order book in both domestic and exports Positive Positive 469
provides robust growth visibility and we expect
a 15% topline CAGR over FY2020-FY2022.
Moreover, margin improvement is expected
to sustain given the cost-control initiatives.
Q3FY2020 results were ahead of our estimates
as margins surprised positively. We have broadly
retained our earnings estimates for FY2021.
Exide Industries Downwards Exide’s topline growth is expected to recover Positive Positive 227
on account of improvement in automotive OEM
volumes and improved traction in the industrial
segment. Margins are expected to improve driven
by soft lead prices and cost-control measures
undertaken by the company. We have reduced
our FY2020 and FY2021 earnings estimates by
7% each to factor topline miss in Q3FY2020 and
lower realisation due to fall in lead prices.
GNA Axles Downwards Revenue is expected to remain under pressure Positive Book NA
given the deterioration in export markets, Out
especially in the U.S. Margins are expected
to decline due to negative operating leverage
because of fall in the topline and adverse mix due
to steep decline in exports. We have reduced our
FY2020 and FY2021 estimates by 26% and 35%,
respectively.

February 20, 2020 17

 Sector Update
Volume growth (%) Segmental volume growth trend in CV
100%
MSIL
80%
HMCL
BAL 60%
TVS
40%
M&M (Auto)
M&M (Tractor) 20%
ALL 0%
TAMO (Domestic) Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20
-20%
TAMO (JLR)
Eicher (Motorcycle) -40%
Eicher (CV) -60%
-40 -30 -20 -10 0 10 MHCV LCV

Source: Company; Sharekhan Research Source: Company; Sharekhan Research

Segmental volume growth trend in 2W and PV Auto universe y-o-y revenue growth trend

20% 120,000 30
15% 100,000 20
10%
80,000
5% 10
0% 60,000
Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 0
-5% 40,000
-10% -10
20,000
-15%
-20% 0 -20
Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20
-25%
2W PV Auto universe Revenues (LHS - Rs Cr) Growth (% - RHS)

Source: Company; Sharekhan Research Source: Company; Sharekhan Research

Auto universe y-o-y EBITDA - OPM trend Auto universe y-o-y PAT growth trend
16,000 16 10000 40
14,000 30
15 8000
12,000 20
14
10,000 6000 10
8,000 13
4000 0
6,000
12 -10
4,000 2000
11 -20
2,000
0 -30
0 10
Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20
Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20
Auto Universe EBITDA (Rs cr) Adjusted OPM (%) Auto universe Pat Adjusted (Rs Cr - LHS) Growth (% - RHS)

Source: Company; Sharekhan Research Source: Company; Sharekhan Research

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

February 20, 2020 18

 Know more about our products and services

For Private Circulation only

Disclaimer: This document has been prepared by Sharekhan Ltd. (SHAREKHAN) and is intended for use only by the person or entity
to which it is addressed to. This Document may contain confidential and/or privileged material and is not for any type of circulation
and any review, retransmission, or any other use is strictly prohibited. This Document is subject to changes without prior notice.
This document does not constitute an offer to sell or solicitation for the purchase or sale of any financial instrument or as an official
confirmation of any transaction. Though disseminated to all customers who are due to receive the same, not all customers may
receive this report at the same time. SHAREKHAN will not treat recipients as customers by virtue of their receiving this report.
The information contained herein is obtained from publicly available data or other sources believed to be reliable and SHAREKHAN
has not independently verified the accuracy and completeness of the said data and hence it should not be relied upon as such. While
we would endeavour to update the information herein on reasonable basis, SHAREKHAN, its subsidiaries and associated companies,
their directors and employees (“SHAREKHAN and affiliates”) are under no obligation to update or keep the information current. Also,
there may be regulatory, compliance, or other reasons that may prevent SHAREKHAN and affiliates from doing so. This document is
prepared for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Recipients
of this report should also be aware that past performance is not necessarily a guide to future performance and value of investments
can go down as well. The user assumes the entire risk of any use made of this information. 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. We do not undertake to
advise you as to any change of our views. Affiliates of Sharekhan may have issued other reports that are inconsistent with and reach
different conclusions from the information presented in this report.
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 SHAREKHAN 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.
The analyst certifies that the analyst has not dealt or traded directly or indirectly in securities of the company and that all of the
views expressed in this document accurately reflect his or her personal views about the subject company or companies and its or
their securities and do not necessarily reflect those of SHAREKHAN. The analyst further certifies that neither he or its associates
or his relatives has any direct or indirect financial interest nor have actual or beneficial ownership of 1% or more in the securities of
the company at the end of the month immediately preceding the date of publication of the research report nor have any material
conflict of interest nor has served as officer, director or employee or engaged in market making activity of the company. Further, the
analyst has also not been a part of the team which has managed or co-managed the public offerings of the company and no part
of the analyst’s compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this
document. Sharekhan Limited or its associates or analysts have not received any compensation for investment banking, merchant
banking, brokerage services or any compensation or other benefits from the subject company or from third party in the past twelve
months in connection with the research report.
Either SHAREKHAN or its affiliates or its directors or employees / representatives / clients or their relatives may have position(s), make
market, act as principal or engage in transactions of purchase or sell of securities, from time to time or may be materially interested
in any of the securities or related securities referred to in this report and they may have used the information set forth herein before
publication. SHAREKHAN may from time to time solicit from, or perform investment banking, or other services for, any company
mentioned herein. Without limiting any of the foregoing, in no event shall SHAREKHAN, any of its affiliates or any third party involved
in, or related to, computing or compiling the information have any liability for any damages of any kind.

Compliance Officer: Mr. Joby John Meledan; Tel: 022-61150000; email id: compliance@sharekhan.com;
For any queries or grievances kindly email igc@sharekhan.com or contact: myaccount@sharekhan.com

Registered Office: Sharekhan Limited, 10th Floor, Beta Building, Lodha iThink Techno Campus, Off. JVLR, Opp. Kanjurmarg
Railway Station, Kanjurmarg (East), Mumbai – 400042, Maharashtra. Tel: 022 - 61150000. Sharekhan Ltd.: SEBI Regn. Nos.: BSE
/ NSE / MSEI (CASH / F&O / CD) / MCX - Commodity: INZ000171337; DP: NSDL/CDSL-IN-DP-365-2018; PMS: INP000005786;
Mutual Fund: ARN 20669; Research Analyst: INH000006183;

Disclaimer: Client should read the Risk Disclosure Document issued by SEBI & relevant exchanges and the T&C on www.sharekhan.com;
Investment in securities market are subject to market risks, read all the related documents carefully before investing.