Hero MotoCorp Seen Most Vulnerable Despite Supreme Court’s BS-IV Relief

India’s largest two-wheeler maker stands to lose the most despite the Supreme Court allowing partial relief on sale of BS-IV vehicles after the March 31 deadline in the wake of the coronavirus lockdown.

The most vulnerable original equipment maker is Hero MotoCorp Ltd., followed by Bajaj Auto Ltd., as others do not have a very concentrated risk, Gunjan Prithyani, auto analyst at JPMorgan, said in a report.

That factors in 20-25 percent loss on unsold stock, Prithyani wrote, adding that the risk for Bajaj Auto will be lower since it can route the inventory to export markets.

There are 7 lakh units of unsold two-wheelers, 15,000 cars and 12,000 commercial vehicles complying with older Bharat Stage-IV standards, according to the Federation of Automobile Dealers Associations of India. JPMorgan estimates this inventory to be worth Rs 7,500 crore—scooters and motorcycles worth Rs 4,000-4,500-crore; commercial vehicles worth Rs 2,500-3,000 crore; cars and utility vehicles worth Rs 800-1,000 crore.

Auto sales during March came to a standstill after India went into a lockdown to contain the Covid-19 pandemic. That prompted auto dealers to move the top court seeking relief in registration of BS-IV vehicles after the deadline as anything not sold till March-end would turn into scrap.

The Supreme Court said:

• All vehicles sold but not registered within the deadline can be registered till April 30. Details of unregistered vehicles, including purchasers, will have to be shared by FADA by April 3. The lobby will also provide the top court with details of the registrations after April 30.
• Of the unsold vehicles, up to 10 percent can be registered till 10 days after the lockdown is lifted. Details of vehicles sold need to be submitted to the top court on an affidavit and only those vehicles will be allowed to be registered.
• The relaxations don’t apply to Delhi and National Capital Region as pollution levels there have been a consistent concern.

The court also ruled out any further relief to the industry, saying that the automakers and dealers were given adequate notice regarding the timeline for sticking to the new BS-VI standards. And whatever relief has been provided is because of the lockdown.

Still, Goldman Sachs said it would be a challenge to sell the older inventory despite this relief. Usually, a customer would expect the vehicle to be registered within two or three days after making the full payment. This will take more than 10 days after the lockdown is lifted as the Supreme Court will first approve the list, the brokerage said in a report. Banks and non-bank lenders may not finance such BS-IV vehicles once the restrictions are lifted, it said.

One way is to sell them as used vehicles as the March 31 deadline doesn’t apply to such inventory, Goldman Sachs said.

Sahil Kedia, analyst at Bofa ML, said the automakers could also repurpose these vehicles for the export market.

Also Read: Two-Wheeler Dealers Worried Unsold BS-IV Inventory Will Turn Into Scrap

Company-Wise Impact

Hero MotoCorp

• According to Goldman Sachs, Hero MotoCorp carries the highest BS-IV inventory of around two weeks and is the most exposed to a large monetary hit from liquidating this stock.
• JPMorgan sees a one-time hit of around Rs 300 crore on Hero MotoCorp’s earnings in the quarter ending March or April-June. On the earnings estimated for the fiscal ending March, that’s equivalent of 10-12 percent of its profit after tax.
• Morgan Stanley estimates the one-time impact at $50 million on Hero MotoCorp or about 11 percent of its profit for FY20.
• Ashwin Patil, analyst at LKP Securities, told BloombergQuint that he expects Hero MotoCorp to be impacted the most due to high presence in rural markets.

Bajaj Auto

Bajaj Auto is confident of retailing most of its older inventory and is offering discounts, according to analyst reports. Autocar India quoted Managing Director Rajiv Bajaj as saying that it was against any extension in deadline for BS-IV sales as it would be unfair to those who has worked to meet the April 1 deadline.

Still, according to LKP Securities, weak global demand because of the Covid-19 pandemic will hurt the company’s ability to also sell in the export markets.

Others

• TVS Motor Co. Ltd. said in an analyst call that it has around 30,000 units of older two-wheelers and the company is confident of retailing most of it by March 31.
• Royal Enfield, made by Eicher Motors Ltd., is best positioned as it claims to have no BS-IV inventory.

Hero MotoCorp is yet to respond to BloombergQuint’s emailed queries.