Auto - September 2012 quarter earnings preview - BRICS Research

We expect auto companies under our coverage to report a growth of 8% yoy in revenue (down 7% qoq, mainly due to weak demand) and a flat growth in earnings (down 10% qoq). The sector is witnessing demand pressures, though earnings will be supported by four-wheelers (up 6% yoy). Margins are estimated to decline marginally by 8bps yoy and 35bps qoq to 12.4%, mainly due to a drop in volumes.

The revenue growth of 8% yoy is one of the lowest in the last three years. Volumes of most of the segments—M&HCV, tractors, cars and two-wheelers—have been declining due to the economic slowdown. LCVs and UVs are expected to be the only two segments to record a yoy growth in Q2FY13. Low IIP levels, rising inflation, high interest rates and slow growth in real income have impacted demand in the auto sector. Among the companies in our coverage universe, we expect M&M and Tata Motors to deliver the best performance in Q2FY13 with an earnings growth of 16% yoy and 6% yoy respectively. Bharat Forge is estimated to report an earnings growth of 6% yoy, while Escorts is expected to go against the growth trend in the tractors industry by recording an earnings growth of 200% yoy. Other companies, such as Ashok Leyland, Bajaj Auto, Hero MotoCorp, Maruti and TVS Motor are expected to record a yoy decline of 38%, 6%, 18%, 5% and 63% respectively in earnings.

Four-wheelers: Low IIP levels, high interest rates and slow growth in real income have been impacting the four wheeler segment, which reported a volume growth of 3% yoy (down 3% qoq) in Q2FY13. Ashok Leyland's strong volume growth of 26% yoy was supported by sales of LCV Dost, while the volume growth of 9% yoy by Tata Motors (supported by Evoque), 8% yoy by Escorts and (5% yoy) by M&M was driven mainly by an excellent performance in the UV space. We expect the four wheeler segment to record a revenue growth of 13% yoy (down 6% qoq) and an earnings growth of 6% yoy (down 9% qoq, mainly due to weak demand in Q2FY13. We expect the margins of the four wheeler segment to expand marginally by 23bps yoy to 11.7%, mainly due to the contribution of Tata Motors and M&M.

Two-wheelers: In Q2FY13, the segment recorded a decline of 13% yoy and 12% qoq in volumes, due to increased fuel prices and higher interest rates, which impacted domestic demand. The leader in the segment, Hero MotoCorp, reported a decline of 14% yoy in volumes for Q2FY13, followed by a decline of 10% yoy and 20% yoy by Bajaj Auto and TVS. We expect the segment to record a decline of 12% yoy in revenue (up 11% qoq) and 14% yoy and 13% qoq in earnings.

Within the overall auto space, we are positive on M&M and Tata Motors.

Source : Equity Bulls

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