Q4 FY12 Results: Margins to remain under pressure for autos, MOST

Slowdown visible in 2Ws and cars; UVs and CVs maintain momentum: The impact of macro headwinds, which gathered momentum over the last 12 months, has finally been felt in automobile volumes. While cars and tractors are the worst impacted, there are initial signs of a slowdown among 2-wheelers (2Ws). Auto volumes grew by just 12.2% YoY in 4QFY12 (up 5% QoQ). 2W volumes grew 12.6% YoY (and 1% QoQ) and passenger car volumes increased 9.5% YoY (30% QoQ). CV volumes were up 18% YoY (20% QoQ), with M&HCV volumes up 7.4% YoY (27.3% QoQ). However, threewheeler (3W) volumes declined 1% YoY (down 5% QoQ). Our channel checks indicate that post the festive season, demand has failed to maintain momentum.

4QFY12 margins to remain under pressure: Although commodity prices have started inching up again, they are still lower than last year's levels and also below the 9MFY12 average. This is the case especially for prices of rubber (down ~23% YoY) and aluminum (down ~19% YoY). Also, the rising prices would impact margins with a lag. We estimate our auto universe's 4QFY12 EBITDA margin to decline 30bp QoQ (and 150bp YoY). Our FY12 estimates factor in ~150bp increase in raw material cost (on top of the 290bp increase in FY11), resulting in similar contraction in EBITDA margin (after the 240bp decline in FY11). While we maintain our FY12 consolidated EPS estimate for Tata Motors at INR 35.4, our normalized FY12 EPS estimate is upgraded by 7.7% as we now factor in for lower R&D expenditure. Also, we have increased our FY13 consolidated EPS estimates by 5% to INR40.2 and normalized EPS estimate by 4% to INR25.1 as we now assume higher USD/INR rate at 50 for FY13.

Receding macro headwinds augur well for FY13: Lending rates are at a 13-year peak and are expected to start easing in FY13, which augurs well for PV and CV demand. Further, INR has appreciated by ~2% v/s USD, by ~3% v/s JPY and ~4% v/s EUR. With INR expected to stabilize, albeit at higher levels, there would be improved visibility in operations. Easing of macro headwinds would be a key trigger for re-rating of auto stocks. However, the likely hike in petrol and diesel prices by INR5-6 and INR2-3, respectively, is a potential negative in the short term.

Valuation and view: Auto stocks have outperformed in last 12 months. With a positive view on interest rates and stable commodity prices, we believe that the 4W segment could see revival of performance. We prefer Tata Motors and Maruti Suzuki. Within the 2W space, we like Hero MotoCorp as its margins are set to improve, driving EPS growth of 19% in FY13.

(INR Million)

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