Mr. Aditya Makharia, Institutional Research Analyst, HDFC Securities.
Amidst the COVID disruption, auto/logistic companies have done well by controlling costs, scaling down capex and improving capital allocation in 4QFY20. These cost control measures have led to better-than-expected EBITDA margins. While capex has been cut by 30-70% across the board, companies have also allocated capital better by exiting loss-making global segments and seeking alliances with partners for sub-scale businesses. The NIFTY AUTO index has, resultantly, rallied ~50% from its lows due to the above and a pick-up in volumes for entry-level and rural-centric products (tractors, 2Ws and 'A' segment cars). We have a BUY on Maruti, Hero and Escorts and are cautious on CVs (Ashok Leyland) and premium discretionary (Eicher).
4QFY20 - amidst a challenging quarter, companies have managed to control costs ensuring better-than-expected margins: EBITDA margins for most companies were ahead of our estimates, reflecting the OEMs' ability to control costs/benefits from lower commodity costs. While Bajaj Auto (18.4%) and Mahindra (13.6%) significantly beat our estimates due to a richer product mix and lower fixed cost structure, Hero, Maruti and Ashok Leyland mostly met our estimates. CONCOR has reported healthy margins (30.2%) due to the company's focus on more profitable routes.
Cut-back in capital expenditure: Capex spends have been cut across the board and are expected to be 30-70% lower YoY in FY21E. Most OEMs are focusing on preserving cash in the downturn by delaying spends on new programs (other than that, on the core R&D function). Tata, Hero and CONCOR have cut spends by 50-70% in FY21E, while Mahindra and Maruti have lowered spends by 20-30%.
Companies are focusing on capital allocations: Local four-wheeler OEMs have taken strategic decisions to improve their capital allocation. Mahindra is expected to exit its non-profitable global subsidiaries such as SsangYong and limit investments or exit from other loss-making subsidiaries. Tata Motors is seeking an alliance partner for its sub-scale passenger car business in India in an attempt to restrict incremental investments.
Entry/rural segments are driving growth: The demand for 2Ws and entry-level cars has rebounded, post the COVID led disruption (as sales are up 3- 4x in Jun-20 from the May-20 levels). However, a recovery in MHCV sales is delayed due to excess system capacity and weak investment cycle. The aviation demand is expected to witness a slow recovery while CONCOR is guiding for weak volumes in FY21E.
The NIFTY AUTO index has rallied to pre-COVID levels: NIFTY Auto index is up 46% from the Mar-20 levels (vs 23% for the broader NIFTY), and the index is back to the levels of Feb-20. The rally has been driven by several factors including (1) recovery in volumes for rural segment / increased preference for personal mobility (2) improved focus on capital allocation and (3) benign sector valuations.