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Automobile & Auto Ancillary - Results Preview - Subdued Results on Weak Volume Performance - Reliance Research

Posted On: 2021-10-10 16:27:59 (Time Zone: IST)

Domestic automobile industry delivered a subdued volume performance, with YoY decline in 2QFY22 due to disruptions led by the second COVID wave and chip shortages. Though a steady ease in lockdown/curbs improved the automobile sales, semi-conductor shortages impacted the production and supply. Incremental opening-up of economic activities, pent-up demand and improving sentiment across the country resulted in better sales towards start of the quarter. Notably, the CV and 3W industry witnessed an improvement in sales volume, while 2Ws remained laggards. On the other hand, exports markets witnessed a sharp uptick in sales volume. Inventory level across the automobile segments remained slightly higher than the normal level at the quarter-end. While companies hiked prices across segments to mitigate the higher commodity prices, the quantum of hike was not commensurate with cost escalation. Discounts/offers were also inched up due to the weak demand scenario. Tight cost control measures and economies of scale would negate the adverse impact of higher RM cost to some extent. However, a sharp run-up in the commodity cost would impact the overall margin of auto companies, despite a price hike. Within the automobile segment, CV and 3W segments withstood remarkable improvement with healthy YoY and QoQ growth.

We expect the companies having a higher exposure to overseas markets to report a relatively better performance owing to the faster recovery in global auto sales. The companies with a higher exposure to CVs and 3Ws in the domestic market would also benefit due to demand revival in these segments. Further, tyre manufacturers are expected to witness a margin pressure due to the higher RM cost and a limited ability to pass on the cost escalation.

Result Expectations

Auto companies under our coverage universe are expected to witness 11% YoY growth (up 3% QoQ) in revenue, while higher RM cost and lower scale would impact their profitability. EBITDA margin of our automobile coverage universe is expected to decline by 366bps YoY (down 19bps QoQ) to 8.6%, while PAT is expected to decrease by 95% YoY (as against a huge loss reported by our coverage universe in 1QFY22). We expect PAT of our auto coverage universe (ex-TTMT) to decline by 11% YoY (up 55% QoQ), while TTMT is expected to report a quarterly loss of Rs47bn.

Most companies within the OEM space and auto ancillary segment are expected to report a profit in 2QFY22, barring Ashok Leyland (AL) and Tata Motors (TTMT). We expect TTMT to report Rs47bn net loss during the quarter. On the other hand, Bharat Forge (BHFC) is seen as an outlier, as we expect a strong 55x YoY (up 15% QoQ) growth in net profit to Rs2.4bn on low base.

We expect Bajaj Auto (BAL) to report a higher PAT due to increased exports at a favourable exchange rate and lower tax rate, despite higher commodity cost. We expect M&M (MM) to deliver better performance due to better PV volumes, despite lower tractor volumes, while Escorts (ESC) would deliver a decent performance due to improvement in construction equipment business, despite lower tractor volume. While AL and TTMT are expected to report a net loss, all companies within our coverage universe like Maruti Suzuki (MSIL), Hero MotoCorp (HMCL), TVS Motor (TVSL), Apollo Tyres (APTY), JK Tyre (JKT), CEAT, Minda Industries (MNDA), Bharat Forge (BHFC) and RK Forgings (RFL) are expected to report a decent profit in 2QFY22. TTMT is expected to report Rs47bn net loss (vs. Rs6bn net loss in 1QFY22) due to a weak JLR performance, impacted by semiconductor shortage.

Our View: We expect the automobile industry to witness a volume improvement across segments with festival season kicking in 2HFY22E. While we believe an increasing COVID vaccination coverage and several government initiatives would support auto sales in 2HFY22, we do not expect the quantum and pace of recovery to be as high and sharp in the coming festive season, as witnessed in last year. We expect some improvement in semiconductor supply but issue would continue till FY22-end. We expect the rural economy to get healthy traction led by a healthy agri output and favourable monsoon, which would continue to support the companies on the volume front. We believe the CV segment to outperform the industry, while within this segment, M&HCV would stage a strong bounce-back with ~100% YoY growth in FY22E. Thus, we remain constructive on the automobile sector and maintain a positive stance on the M&HCV segment. At this juncture, we prefer the global plays compared to pure domestic plays due to a better traction in the global markets.

Top Picks: Ashok Leyland, Tata Motors, Bharat Forge and RK Forgings

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