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Q1 earnings preview: Low base, good rural demand to help auto firms post solid growth


Indias auto industry is likely to report double-digit topline growth for the quarter ended June 2018. A low base effect, strong rural demand and healthy growth in overseas sales are likely to aid top lines and bottom lines for the quarter.

The sector witnessed a healthy growth momentum in Q1FY19 with two-wheelers growing 15 per cent year-on-year, three-wheeler 67 per cent YoY and commercial vehicles 50 per cent YoY.

The industry took a beating last year as original equipment makers (OEM) had lowered dispatches of vehicles to dealer in order to ensure clearance of channel inventory ahead of GST implementation.

Emkay Global Financial Services believes all automotive manufacturers are likely to report double-digit revenue growth with best performers being Ashok Leyland (over 42 per cent YoY), Bajaj Auto (over 40 per cent YoY), Maruti Suzuki (over 28 per cent YoY), Eicher Motors (over 26 per cent YoY) and TVS Motors (over 26 per cent YoY).

Despite higher commodity prices, aggregate Ebitda margin (ex-Tata Motors) is likely to expand on a QoQ basis, owing to price hikes and operating leverage benefits, according to Emkay Global.

The impact of increasing commodity prices including steel and crude oil will partially offset by fall in the price of aluminium, rubber and lead prices.

Motilal Oswal Financial Services said that Ebitda margin for their auto OEM (ex-JLR) universe is likely to expand (200bps YoY and 60 bps QoQ to 13.8 per cent) for the fourth consecutive quarter, as high commodity costs are offset by price increases and operating leverage.

Emkay expects companies including Maruti Suzuki (130 bps), TVS Motors (50bps) and Mahindra & Mahindra (40bps) are likely to see a material improvement in margins. “Overall, we forecast Ebitda margin for companies under our coverage (ex-Tata Motors) to expand by 40 bps QoQ (170 bps YoY),” the brokerage house added. Maruti Suzuki is among the top picks of Motilal Oswal, where it believes that Mahindra & Mahindra is the best play on rural market recovery.

The country's largest car maker Maruti Suzuki India (MSI) on July 1 reported a 36.3 per cent increase in total sales at 1,44,981 units in June as against 1,06,394 units in the year-ago month, Mahindra and Mahindra (M&M) reported a 26 per cent increase in total sales at 45,155 units in June.

Kotak Institutional Equities also estimated a strong quarter for auto companies with revenue, Ebitda and net profit improving by 26, 50 and 56 per cent YoY. “We expect revenue growth of companies under our coverage, excluding Tata Motors, to increase by 26 per cent YoY (aided by low base effect) and Ebitda margin to improve by 210 bps YoY as the increase in input costs will be more than offset by operating leverage benefits,” Kotak said.

The brokerage expects Ashok Leyland, Balkrishna Industries, Mahindra & Mahindra, Maruti Suzuki and bearing companies to report a strong quarter.

Tata Motors is likely to witness a steep compression in margin (250 bps QoQ) on account of lower scale in JLR/standalone operations and commodity inflation.

Going forward, automobile industry is looking in a sweet spot on the back of a cyclical recovery across segments. The stage is looking set for strong growth in automobile demand during the ongoing financial year led by rise in government's infrastructure spending and persistent focus on the rural economy, strong rural demand and new launches. Two wheelers, tractors, passenger vehicles and commercial vehicles segments are likely to witness double-digit volume growth over FY18-20E.

Emkay Global further added that the ongoing financial year would be a good year for companies that are direct or indirect beneficiaries of revival in rural demand, such as Hero MotoCorp, Bajaj Auto, M&M, and Escorts. “We also believe that Ashok Leyland would be an outperformer given that it is the best proxy for the MHCV sales upcycle. Tata Motors could spring a surprise, as currency worries subside and momentum in volume growth persists,” the brokerage house said.

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