Auto sector preview: EBIDTA margins seen muted

We expect two-wheeler companies in our coverage universe to report double-digit YoY growth in their 4QFY12 earnings, led by single-digit volume growth and higher average realisation. For the quarter, Hero MotoCorp and Bajaj Auto reported YoY single-digit volume growth, while TVS Motor Company reported a decline of 1%. We expect EBIDTA margins of all these companies to remain muted driven by higher commodity prices and reduced operating leverage. Following the recent run-up in the share price of Bajaj Auto and HeroMotoCorp, we downgrade the rating of these companies from Hold to Sell, while the rating of TVS Motor has been upgraded from Hold to Buy after a steep correction in its share price.

Volume growth moderates further in 4QFY12: Two-wheeler volume growth during the quarter moderated to single-digit, in line with the view in our sector report, ‘Slowing Down’ dated 28 November 2011. All the three two-wheeler companies in our coverage universe have reported a decline in volumes on QoQ basis. Overall volume growth of Bajaj Auto and Hero MotoCorp moderated to 7.3% and 8.1% YoY, respectively, while in the case of TVS Motor the volumes declined 1% YoY. In the domestic market, volumes of Bajaj Auto and TVS Motor were almost flat, with Bajaj Auto reporting a decline of 0.4% YoY and TVS Motor reporting a meagre growth of 2.2% YoY. Following the moderation in volume growth, we expect net sales of all the companies to decline on QoQ basis.

EBIDTA margins likely to be muted: Following lower volumes in 4QFY12, we don’t expect any significant QoQ EBITDA margin expansion for two-wheeler manufacturers, given the reduced operating leverage. We expect only Hero MotoCorp to report a marginal improvement in its EBIDTA margin, driven by lower advertising spending and favourable currency movement. For TVS Motor and Bajaj Auto, we expect EBIDTA margins to drop on QoQ basis. We expect TVS Motor’s EBIDTA margin to contract 25bps following an inferior product mix and higher advertising expenditure, while in the case of Bajaj Auto we believe its EBIDTA margin would contract 90bps QoQ.

Earnings likely to show double-digit growth: We expect all three two-wheelers companies in our coverage universe to report strong double-digit earnings growth YoY, driven by higher net sales and lower tax outgo. However, on QoQ basis, we expect the earnings of Bajaj Auto and TVS Motor to report a fall of 8.8% and 7.0% respectively, while in the case of Hero MotoCorp we expect its earnings to grow 1%.

Bajaj Auto : We expect Bajaj Auto to report 13.4% YoY growth in net sales, led by 7.3% YoY volume growth and 4.3% YoY rise in average realisation. We expect its EBIDTA margin to contract 40bps YoY following an inferior product mix and rupee appreciation during the quarter. EBIDTA for the quarter is expected to grow 11.1% YoY to Rs9.57 bn. On the back of higher EBIDTA and lower tax rate, we expect the company to report earnings growth of 15.3% YoY at Rs7.79 bn.

Hero MotoCorp : The company is likely to report revenue growth of 11.0% YoY, driven by 8.1% volume growth and 2.8% YoY improvement in realisation. We expect its EBIDTA margin to improve 30 bps QoQ, driven by lower advertisement expenses and favourable currency movement. Driven by likely higher EBIDTA (up 11.5% YoY) and lower tax rate (16.0%), we expect the company to report net profit growth of 22.8% YoY at Rs.6.16 bn.

TVS Motor : The Company’s volume growth during the quarter was the slowest when compared with other two-wheeler companies. Volumes de-grew by 1.0% YoY and 0.3% QoQ. Following lower volume growth, we expect TVS Motor to report revenue growth of 7.1% YoY, largely driven by 8.3% growth in average realisation. EBIDTA margin is likely to improve 68bps YoY to 6.7%, but on QoQ basis the same is expected to fall 28bps because of an inferior product and higher other expenditure. Expect the company to report a PAT of Rs527 mn, up 26.4% YoY and down 6.8% QoQ.

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