Automobile & Auto Ancillary - Results Preview - Muted Performance; CV and PV to Outperform

Domestic automobile industry delivered a subdued volume performance across segments (ex CV and 3W), with YoY decline in 4QFY22 due to impact of the third Covid wave, particularly in rural markets and supply constraints due to chip shortage. Though semi-conductor shortages seem to be currently improving it has partially impacted the production and supply of PVs, LCVs and high-end 2Ws in 4QFY22. Recent geopolitical issue has impacted supply towards end of the quarter. Though, Omicron took a toll on volumes towards the start of the quarter while, incremental opening-up of economic activities, pent-up demand and an improving sentiment across the country resulted in better sales towards quarter-end. Notably, the CV and 3W industry witnessed an improvement in sales volume, while 2Ws remained laggards. On the other hand, PV demand continued to remain strong with strong order bookings. Exports markets also witnessed a sharp uptick in sales volume. While companies hiked prices across segments to mitigate the higher commodity prices, the quantum of hike was not commensurate with the cost escalation. Discounts/offers were also inched up due to the weak demand scenario, particularly for M&HCVs & 2Ws. Tight cost control measures and economies of scale would negate the adverse impact of higher RM cost to some extent. Overall sharp run-up in the cost of commodities such as aluminium, steel, precious metals (Palladium, Platinum and Rhodium) and crude derivatives would impact the operating margins of auto companies, despite a price hike. Within the automobile segment, CV and 3W segments witnessed a decent YoY and QoQ growth.

The companies with a higher exposure to CVs and 3Ws in the domestic market would benefit due to a demand revival in these segments. However, due to supply chain issues and semiconductor constraints-led production cut by global giants, the companies having a higher exposure to the overseas markets would report a relatively weaker performance. 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 1% YoY growth (up 11% 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 272bps YoY (up 79bps QoQ) to 10.7%, while PAT is expected to decrease by 41% YoY (up 88% QoQ). We expect PAT of our auto coverage universe (ex-TTMT) to decline by 5% YoY (up 7% QoQ), while TTMT is expected to report a PAT of Rs7.9bn, as against a net loss of Rs19.2bn YoY.

Most companies within the OEM space and auto ancillary segment are expected to report a profit in 3QFY22, barring CEAT. We expect CEAT to report Rs270mn net loss during the quarter. On the other hand, RK Forging (RMKF) is seen as an outlier, as we expect a 52% YoY (up 20% QoQ) growth in net profit to Rs541mn.

We expect Bajaj Auto (BAL) to report a subdued PAT due to lower volumes and higher commodity cost despite decent exports. We expect M&M (MM) to deliver a better performance due to improved PV volumes, while Escorts (ESC) would deliver a subdued performance due to decline in the construction equipment business and lower tractor volume. While CEAT is expected to report a net loss, all other companies within our coverage universe like Maruti Suzuki (MSIL), Hero MotoCorp (HMCL), TVS Motor (TVSL), Ashok Leyland (AL), Tata Motors (TTMT), Apollo Tyres (APTY), JK Tyre (JKT), CEAT, Minda Industries (MNDA), Bharat Forge (BHFC) and RK Forgings (RMKF) are expected to report a profit in 4QFY22, though it would decline YoY in most cases. TTMT is expected to report Rs7.9bn net profit (vs. Rs19bn net loss in 4QFY21 and Rs51bn net profit in 3QFY22) due to a growth in India PV/CV business coupled with sequential improvement in JLR performance with better supply of semiconductors.

Our View

We expect the automobile industry to witness a volume improvement across segments, from the current low level, with likely revival in rural economy backed by healthy agri output. We expect some improvement in the semiconductor supply, but the issue would continue for the next 1-2 quarters. We believe the CV segment would outperform the industry, while within this segment, M&HCV would stage a strong bounce-back with healthy double digit YoY growth in FY23E. Thus, we remain constructive on the automobile sector. We believe in strong export story over next 1-2 years and benefit of rupee depreciation to continue. We expect the 2W segment to bounce back in domestic as well as exports in FY23. Along with a valuation comfort, the risk-reward is highly favourable for 2W companies, which would give a strong outperformance going ahead.

Top Picks: TVS Motors, Bajaj Auto and MSIL

Source : Equity Bulls

Keywords

RelianceSecurities Automobile AutoAncillary ResultsPreview Q4FY22