Force Motors Banks On Strong Luxury Car Sales to Grow Topline in FY2019

Equity Analyst, LightStream Research

Chacko Jacob

Equity Analyst

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Equity Bottom-Up

Force Motors is a vertically integrated Indian automobile manufacturer holding the title of being the only company in the world that supplies engines to both German automobile behemoths, BMW and Mercedes-Benz. The company also has its own line of passenger and commercial vehicles which account for 60% of its revenue. While we are bullish on the company’s growth in the long term (&gt;6months), we think short-term factors are likely to disrupt the company’s operations.<ul><li>With the hike in cess over and above the GST, luxury car prices have nearly reverted to pre-GST levels. While the company stands to derive the benefits of frantic buying witnessed ahead of the introduction of the hike, we think that 3QFY2018 results will be muted due to the rise in prices.</li><li>Force Motors continues to produce only diesel-powered automobiles as part of its automobile manufacturing segment, the likes of which the government wants to phase out by 2030. Since the company is also exposed to luxury car manufacturers with diesel cars in their portfolio, it is susceptible to surprise policies and bans like the one in December 2015, when the Supreme Court banned the registration of diesel vehicles over 2000cc in Delhi.</li></ul>The company's 1-year blended PE of 33x and EV/EBITDA of 19.4x make it relatively expensive to its peers that are more diversified in their portfolio and geographical sales. We think the consensus prices in the prospects of increasing luxury car sales in the country and the "localisation" of the same. The company's new partnership with Roll Royce leaves space for additional growth, along with much-needed diversification from automobiles.Since we think the stock could see a near-term downside of 5-10% from the uncertainty in luxury car sales, we have a bearish outlook. However on a long-term basis, using our FY2018E EPS of 144.5, we arrive at a TP of INR 4,780 which is a 25% upside.

Force Motors is a vertically integrated Indian automobile manufacturer holding the title of being the only company in the world that supplies engines to both German automobile behemoths, BMW and Mercedes-Benz. The company also has its own line of passenger and commercial vehicles which account for 60% of its revenue. While we are bullish on the company’s growth in the long term (&gt;6months), we think short-term factors are likely to disrupt the company’s operations.With the hike in cess over and above the GST, luxury car prices have nearly reverted to pre-GST levels. While the company stands to derive the benefits of frantic buying witnessed ahead of the introduction of the hike, we think that 3QFY2018 results will be muted due to the rise in prices.Force Motors continues to produce only diesel-powered automobiles as part of its automobile manufacturing segment, the likes of which the government wants to phase out by 2030. Since the company is also exposed to luxury car manufacturers with diesel cars in their portfolio, it is susceptible to surprise policies and bans like the one in December 2015, when the Supreme Court banned the registration of diesel vehicles over 2000cc in Delhi.The company's 1-year blended PE of 33x and EV/EBITDA of 19.4x make it relatively expensive to its peers that are more diversified in their portfolio and geographical sales. We think the consensus prices in the prospects of increasing luxury car sales in the country and the "localisation" of the same. The company's new partnership with Roll Royce leaves space for additional growth, along with much-needed diversification from automobiles.Since we think the stock could see a near-term downside of 5-10% from the uncertainty in luxury car sales, we have a bearish outlook. However on a long-term basis, using our FY2018E EPS of 144.5, we arrive at a TP of INR 4,780 which is a 25% upside. 

Hike in GST Cess to Impact Force Motors in 3Q; Revival of Rural Markets Key to FY18 Growth