Automobile Sector - On a roll - PINC Results Preview

With a strong volume growth and softness in commodity prices, we expect Indian automobile industry to improve its profitability on a sequential basis. Demand for automobiles continues to remain strong in an otherwise lean monsoon season leading to healthy volume growth for the industry. Prices of major raw materials except rubber moderated during the quarter and will help the companies in improving their margins.

However on a sequential basis, profitability on a high base of last year is likely to moderate. 2-wheelers and commercial vehicles (CVs) segments are expected to have a stronger performance due to relatively low competitive intensity and robust demand. Impending emission norm changes benefitted CVs due to demand pre-ponement. Our top picks in the sector are Bajaj Auto, Hero Honda and Mahindra & Mahindra.

* Ashok Leyland (AL): We expect AL to expand its margins by 100bps due to robust volume growth of 72% leading to operating leverage.
* Bajaj Auto (BJAUT): Volume growth of 46% and rich mix in 2-wheeler business to help the company in maintaining margins. Reported PAT to grow by 74% due to higher other income.
* Hero Honda (HH): Pricing action and lower commodity prices should help the company to expand its margins by 230bps QoQ. PAT seen flat at Rs6.1bn.
* Maruti Suzuki (MSIL): Despite record sales, margins to decline 200bps due to higher royalty charges. Strong volume to lead to PAT growth of 5% to Rs6bn.
* Mahindra & Mahindra (M&M): Despite healthy volumes, margins are likely to decline by 70bps QoQ due to poor sales mix. Higher dividend income to lead to 15% YoY growth in adjusted PAT.
* TVS Motor (TVSL): Robust sales to aid margin expansion by 260bps. PAT to almost treble to Rs699mn.

Source : Equity Bulls

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