Automobile Sector - Profitability to moderate - PINC Result Preview

After a strong improvement in profitability during FY10, Indian automobile sector is expected to see a moderation in profitability during Q1FY11. This will be more prominent in passenger cars and commercial vehicles segments while 2-wheeler segment is likely to witness stability in profit margins. Demand for the automobiles remained robust during the quarter and this will lead to healthy growth in topline for the sector. Raw material and emission norm changes are expected to exert pressure on profitability leading to margin contraction on a sequential basis. However on a YoY basis, we expect margins to improve for the sector. Our preferred picks in the sector are Bajaj Auto, Maruti Suzuki and Mahindra & Mahindra.

• Ashok Leyland (AL): A volume growth of 178% to drive revenues to Rs25bn. Multifold jump in profit seen due to operating leverage.
• Bajaj Auto (BJAUT): Demand surge in both domestic and export segments has helped the company double volumes. Higher input cost to contract BJAUT margins sequentially.
• Hero Honda (HH): Compared to peers HH has delivered a modest volume growth of 10.3%. Other expenditure would remain high due to sponsorship related expenditure. We expect the company to maintain profits QoQ.
• Maruti Suzuki (MSIL): Volumes are maintained at the Q4FY10 levels. Although, margins are expected to contract sequentially, a higher other income will lead to higher profits.
• Mahindra & Mahindra (M&M): New launches have resulted in a volume growth of 30% for the auto division. Overall volumes are up 24%. Margins to be under pressure due to input cost.
• TVS Motor (TVSL): New models in both motorcycle and scooter segment aided a 42.9% growth in volumes. Better capacity utilisation to help improve margins.

Source : Equity Bulls

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