Auto sector results preview for Q3FY13: Angel Broking

Angel Broking has come with its December`12 quarterly earning estimates for auto sector. The research firm expects UV sales to sustain the growth momentum leading to a 10-12% volume CAGR in PV sales over FY2012-14.

We expect AL's top-line to register a de-growth of ~14% yoy (~25% qoq) largely due to higher discounts and increasing contribution of the lower priced Dost (~36% of total volumes vs 29% in 2QFY2013). We estimate EBITDA margins to decline by 180bp qoq on account of adverse product-mix and higher discounts which are likely to drag down the bottom-line by ~39% yoy (down ~70% qoq).

Festival buying and strong momentum in UV sales boost PV growth: Passenger vehicle (PV) sales recovered during the quarter led by festival demand and strong momentum in UV sales. Although the festival cheer was muted compared to last year, the growth can be considered strong in view of the current economic environment. The domestic PV volumes registered a healthy growth of ~10% yoy YTD in FY2013 (~7% yoy growth in 1HFY2013) backed by an ~62% yoy growth in the UV sales on account of new launches like Ertiga, Duster and XUV5OO. However, despite higher discounts in the PC segment, sales remained muted due to sluggish demand for petrol cars. Going ahead, we expect PC sales to remain lackluster as we do not expect a major revival in petrol car sales in the near term. Nonetheless, we expect UV sales to sustain the growth momentum leading to a 10-12% volume CAGR in PV sales over FY2012-14.

We expect MSIL to post a strong performance in 3QFY2013 (on a low base of last year due to the strike at Manesar plant) driven by ramp up in production at the Manesar plant post the strike in August 2012. We expect the top-line to register a strong growth of ~45% yoy (~36% qoq) driven by ~28% (~33% qoq) and ~14% yoy (~2% qoq) growth in volumes and net average realization respectively. We expect EBITDA margins to improve by ~140bp sequentially on account of favorable product-mix and currency movement and operating leverage benefits. Hence, the bottom-line is expected to surge ~131% yoy, although on a lower base.

Auto ancillaries: We expect auto ancillary companies to report a mixed performance for 3QFY2013. With an up-tick in OEM demand led by festival buying and gradual recovery in replacement demand, primarily in batteries and tyres, the top-line of our coverage universe (ex. Bharat Forge) is expected to post a healthy growth. However, likely margin pressures due to an unfavorable currency and a slightly adverse product-mix (higher share of OEMs) will negatively impact the bottom-line. We expect Apollo Tyres (APTY) and Exide Industries (EXID) to outperform in 3QFY2013 driven by healthy demand and falling raw-material prices. We expect APTY to register a healthy growth of ~10% yoy in consolidated revenues driven by ~11% and ~12% yoy growth in domestic and South Africa revenues respectively. European operations are expected to register a modest growth led by an uncertain macro-economic environment. We expect the consolidated margins to improve 140bp yoy to 11.5% primarily on account of a sharp decline in rubber prices (down ~15% yoy). On the back of the improved operating performance, the adjusted net profit is expected to grow strongly by ~30% yoy. For Bharat Forge (BHFC), we expect the standalone volumes to decline sharply by ~17% yoy led by sharp deceleration in MHCV sales and slowdown in Europe. However, strong realization growth, due to increasing share of machining component and favorable forex movement, is expected to restrict the decline in net sales to ~7% yoy. We expect the bottom-line to decline by ~14% yoy as we expect operating margins to contract by ~210bp yoy on account of reduced operating leverage.

We expect Bosch (BOS) to post an ~8% yoy growth for the quarter due to weak MHCV volumes, the major driver of the company's revenues. We expect EBITDA margins to decline sharply by ~220bp yoy led by raw-material cost pressures (due to INR depreciation) and lower operating leverage. Hence, the net profit is expected to decline by ~29% yoy during the quarter. EXID is likely to witness a strong revenue growth of ~28% yoy led by healthy demand from the automotive OEMs as well as replacement markets and continued traction in the inverter battery sales. We expect EBITDA margins to improve by ~110bp qoq due to price hikes taken in 2QFY2013 (~5% across the replacement segment). Hence net profit is expected to jump ~31% yoy. We expect Motherson Sumi Systems to continue to post improvement in its operating performance driven by improving utilization levels at the domestic level and on the Samvardhana Motherson Reflectec front. Led by consolidation of Peguform operations, the top-line and bottom-line are expected to post an ~61% and ~127% yoy growth, respectively.

Outlook: We believe the 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 export markets and commanding superior pricing power. We remain positive on Ashok Leyland, Hero MotoCorp, Mahindra and Mahindra and Tata Motors.

Company	Net Sales		Net Profit		Reco
	3QFY13E	% chg	3QFY13E	% chg
Ashok Leyland	2,423	-14.4	41	-38.8	Buy
Bajaj Auto	5,255	8.6	810	-5.1	Neutral
Hero Motocorp	6,141	2.6	602	-1.8	Accum.
Maruti Suzuki	10,938	45.3	474	130.7	Neutral
M&M	10,915	31.8	876	32.3	Accum.
Tata Motors	48,794	8	2,865	-15.9	Accum.
TVS Motor	1,793	3.6	59	4.2	Accum.
Apollo Tyres	3,559	10.3	166	29.6	Accum.
Bharat Forge	856	-7	89	-13.7	Accum.
Bosch	2,112	8.2	199	-29	Neutral
Exide Industries	1,593	27.5	137	31.4	Accum.
FAG Bearings	365	5.4	39	-9.9	Accum.
Motherson Sumi	6,068	60.9	127	127.3	Neutral

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