Automobile sector results preview for Q2FY13: Angel Broking

While OEM demand continued to remain weak on account of macro concerns such as high interest rates and negative consumer sentiments, replacement sales also witnessed lower-than-expected off-take due to weak economic activity and higher inflation. Nonetheless, we expect Apollo Tyres (APTY) to outperform the overall sector's earnings growth in 2QFY2013 as well, driven by receding cost pressures.

We expect APTY's consolidated top-line to register a healthy growth of 12% yoy driven by strong growth in South Africa and healthy growth in India and Europe. EBITDA margin is estimated to improve by ~330bp yoy (30bp qoq) to 11.4% benefitting from a 14.3% yoy (6.5 qoq) decline in natural rubber prices. As a result, the adjusted net profit is expected to increase substantially by 84.3% yoy (3.8% qoq).

On a standalone basis, we expect Bharat Forge (BHFC) to report modest revenue growth of 2.4% yoy, driven by 10% yoy growth in net average realization. The company is expected to benefit from higher share of machining component. We expect the company's volumes to decline by 7% yoy following a 12.9% yoy decline in MHCV volumes. The operating margin is expected to improve by 117bp yoy led by stable commodity prices and a superior product-mix. However, we expect the bottom-line to decline by 3.1% primarily due to an increase in interest expense.

For the quarter, we expect Bosch (BOS) to post a moderate revenue growth of 5% yoy on account of poor volume growth in the CV and tractor segments which are the primary drivers of the company's revenues. Meanwhile, Bosch has also announced temporary production cuts at its plants in Nashik, Jaipur and Bangalore to avoid unnecessary buildup of inventory amidst slowdown in the industry. We expect operating margins to contract sharply by 260bp yoy on account of raw-material cost pressures (due to INR depreciation) and lower operating leverage benefits. As a result, the net profit is expected to decline by 22.8% yoy (10.1% qoq) during the quarter.

We expect Exide Industries (EXID) to witness a strong revenue growth of 16.1% yoy (down 12% sequentially due to lower OEM volumes) driven by growth in four-wheeler replacement and inverter batteries. While we expect EBITDA margins to improve by 30bp sequentially; net profit is expected to decline by 11.7% qoq mainly on account of a sequential decline expected in the top-line. On a y-o-y basis, the net profit is expected to jump significantly by 162.4% due to the base effect.

We expect Motherson Sumi Systems (MSS) to report improvement in its operating performance driven by pick-up in order execution at the new plant in Hungary. However, lower operating efficiency at Peguform facilities may pose margin pressures. Led by consolidation of Peguform operations, the top-line and bottom-line are expected to post a 177.1% and 102.6% yoy growth, respectively.

Outlook: We believe long-term structural growth drivers of the domestic automotive industry such as GDP growth (leading to increasing affluence of rural and urban consumers), favorable demographics, low penetration levels, entry of global players and easy availability of finance are intact, which should support a 10-12% CAGR in auto volumes over FY2012-14E. As such, we prefer stocks that have strong fundamentals, high exposure to rural and exports markets and commanding superior pricing power. We remain positive on Ashok Leyland, Hero MotoCorp, Mahindra and Mahindra and Tata Motors.

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