Auto`s Q1FY13 margins to remain under pressure: MOSt

Motilal Oswal has come with its June quarterly earning estimates for automobile sector. According to the research firm two-wheeler stocks, Bajaj Auto and Hero MotoCorp are likely to report muted earnings growth at 2% and 8%, respectively.

Last 12 months of headwinds to continue in the near term, resulting in lowest volume growth since 1HFY10: The impact of macro headwinds, which gathered momentum over the last 12 months, is reflecting in automobile volumes. While three-wheelers (-12% YoY), cars (+3% YoY) and M&HCVs (-11% YoY) are the worst impacted, there are initial signs of moderating growth in two-wheelers (+10% YoY) and LCVs (+17% YoY). However, volume growth momentum continues in UVs (+24% YoY). Auto industry volumes grew just 8% YoY (declined 1% QoQ) in 1QFY13 - the lowest volume growth in three years. Our channel checks indicate that demand momentum is weak across segments and is likely to remain weak till the arrival of the festive season. 1QFY13 margins under pressure due to adverse product mix, adverse forex movement and negative operating leverage: We expect the aggregate EBITDA margin for our Automobiles universe to decline 80bp QoQ (170bp YoY) in 1QFY13, impacted by adverse product mix, adverse forex movement and negative operating leverage. Our FY13 estimates factor in ~40bp savings in RM cost from the peak level of FY12 (highest RM/Sales ratio since FY01). Our estimates are yet to factor in any savings on commodity costs (INR based), which have declined by up to 6% QoQ in 1QFY13. However, a weaker INR poses a risk to our estimates for Maruti Suzuki and Hero MotoCorp, as we have factored in INR/USD of ~52.5 for FY13. We are downgrading our EPS estimate for Bajaj Auto by ~5% to INR111 for FY13 to factor in adverse product mix and lower volumes. We maintain our estimates for other companies. Receding macro headwinds augur well for FY13: Lending rates are at a 13-year peak and are expected to start easing in FY13, auguring well for PV and CV demand. Further, the recent softening of crude oil prices also augurs well for the automobile industry, as rising fuel prices were one of the key impediments to growth. Lastly, softening in commodity prices would support profitability. However, a weaker INR would impart volatility to operations. Easing of macro headwinds would be a key driver for volume growth and in turn for stock re-rating. Valuation and view: Auto stocks have underperformed in the last three months, reflecting the challenging operating environment. Given our positive view on interest rates, potential part-reversal of petrol prices and stable commodity prices, we believe there could be a revival in the performance of four-wheelers. We prefer Maruti Suzuki, M&M and Tata Motors. Given the lack of any visible catalyst in the near future, we expect two-wheeler stocks to be market performers.

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