Jamna Auto Industries: CV slowdown puts a spoke in the wheel amid Covid pandemic

Investors can book profit in Jamna Auto Industries (JAI), a small-cap auto component player. The stock has run up 176 per cent from the March lows, touching its one-year high on December 31. At ₹60.6 now, the stock trades at 123 times trailing twelve-month earnings. While the company made losses in the June quarter, its profits grew by 74 per cent year-on-year to ₹9.4 crore in the quarter ended September 2020 despite fall in sales, thanks to lower interest and depreciation costs.

Profits fell by 65 per cent year-on-year to ₹49 crore in fiscal 2019-20, thanks to the slowdown in auto sales even then. Basis FY20 earnings, the stock trades at 50 times now.

JAI manufactures conventional leaf springs, parabolic springs, lift axles and air suspension products predominantly for commercial vehicles (CVs). It is the market leader in India, with a share of about 65 per cent in the new vehicle segment. It counts Tata Motors, Ashok Leyland, Bharat Benz, Volvo, Volvo-Eicher, AMW and Izuzu among its clients. Investors can wait for correction in stock price linked to the broader markets and sustained pick-up in new truck sales before they re-enter the stock.

CV outlook unclear

New vehicle sales, which had been already facing multiple challenges since mid-2018, were further hit in 2020 due to Covid-19. Overall volume growth for the auto industry, which stood at 5.15 per cent in 2018-19 (over the previous fiscal), dropped by about 18 per cent in 2019-20.With the Covid-19 outbreak forcing production cuts and dealership shutdowns, new vehicle sales plunged almost 40 per cent in H1 of this fiscal.

CV sales took a sharper dip, falling by 56 per cent in this period, with medium and heavy CV (MHCV) sales plunging a sharper 76 per cent. Pent-up demand due to the lockdown, the onset of the festival season and preference for personal mobility have seen car and two-wheeler sales take off in the last 2-3 months. But CV sales continue to remain on the slow lane, although some segments have seen increased interest in recent times.

Apart from an economic slowdown affecting demand for industrial/construction activity and carriage of goods, the revised permit for existing vehicles to carry higher loads (new axle load norms) — which was announced in mid-2018 — has also been a big blow to new truck sales. The higher prices of new trucks due to transition to BS VI emission norms, amidst a lull in economic activity, have been a dampener too.

The outlook still remains unclear. Indicators such as monthly GST collections touching an all-time high in December point to a heating up in economic activity. However, core sector activity still remains weak, contracting for the ninth consecutive month in November. Sustainability of the green shoots in the October IIP numbers also needs to be seen, given that it could have been propped up by the festival season.

Data from the Indian Foundation for Transport Research and Training on freight rates in key routes across the country show a mixed trend. In the last few months until November, fleet utilisation and rentals have been supported more by one-offs such as non-availability of sufficient trucks due to localised lockdowns in various parts of the country, festival season demand and rise in diesel prices. Without support from these factors, as well as lacklustre demand for industrial and consumer goods, freight rates in December dropped over the previous month. Demand for haulage of agricultural goods has been the only constant.

India Ratings, in a report put out on December 28, forecasts that MHCV sales are unlikely to recover before the fourth quarter of FY22. Light CVs and tippers, though, are expected to do better, based on last-mile connectivity needs for e-commerce players/agricultural products and pick-up in construction activity, respectively.

What could be a silver lining is the implementation of a scrappage scheme for old vehicles, which has long been in the works. But fiscal constraints may not permit it in the near term as it would require doling out of incentives to buyers of new vehicles, on scrapping their old ones. Even if it comes, the pushing of the age of vehicles to be scrapped to 20 years (as per a 2018 plan ) will sharply bring down the number of vehicles to be scrapped.

A CRISIL estimate suggests that the total population of CVs that will be older than 20 years in fiscal 2021 would only be about 50,000 vehicles, as against a population of 6.4 lakh vehicles that would be eligible for scrapping if the age stood at 15 years.

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