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MOSL: AUTOMOBILES- BS6: The Last Hurdle; Value migration – the key risk | MSIL/EIM better positioned

Automobiles: BS6: The Last Hurdle; Value migration – the key risk | MSIL/EIM better positioned

 

Indian automakers are all set to transition to Bharat Stage 6 (BS6) norms from Apr’20. After operating in a tough environment over the last 15 months, the auto industry now faces the last hurdle of BS6 transition, post which it will likely be ‘business as usual’ from 2HFY21, in our view. With the demand environment showing signs of stability and inventory under control, the BS6 transition is likely to be less problematic (unlike BS4). We believe that the BS6 transition would pose a bigger challenge for 2Ws than CVs and PVs given the magnitude of cost inflation, the possibility of a change in competitive positioning and the scope of value migration. We expect some pre-buying in 2Ws and diesel PVs, but limited pre-buy in CVs due to 30-40% excess capacity with fleet operators.

 

• BS6 is the last hurdle in the foreseeable future for the auto industry after going through a difficult operating environment over the last 15 months. This, coupled with initial signs of stability/recovery in demand and under-control inventory, ignites hope of a 'business as usual' scenario from 2HFY21.
• The aforementioned improved scenario, along with the gradual launches of BS6 models (by MSIL, HMCL, TVSL, HMSI, etc.), instills confidence that OEMs would not have to indulge in fire sale by end-Mar'20 to liquidate BS4 inventory.
• 2Ws would face the highest cost inflation of 10-15% due to the BS6 transition. Including BS6, total cost inflation for mainstream <125cc 2Ws would be 20-25%. Hence, we expect 2Ws to be the worst impacted, as BS6 would not just impact overall demand but also pose the risk of value migration and change in competitive positioning of key OEMs.