Automobile sector results preview for Q4FY12: Angel

Angel Broking has come with its March quarterly earning estimates for automobile and auto ancillary sector. The research firm expects auto ancillary cos to report moderate net profit growth.

Auto ancillaries to track the auto sector: While OE demand continues to remain sluggish on account of macro concerns such as rising interest rates and slowdown in industrial activity, replacement sales have also seen moderate offtake due to weakness in overall economic activity, thereby negatively affecting ancillary manufacturers. We, however, expect the demand environment to improve in the OE as well as replacement segment in FY2013, aided by the likely easing of interest rates. During 4QFY2012, we expect auto ancillary companies to report moderate net profit growth on account of modest domestic auto sales and operating margin pressures. We expect a sequential expansion in the operating margins of Bosch and FAG Bearings, mainly due to stronger INR compared to 3QFY2012, as imports form a substantial portion of rawmaterial costs for both the companies.
Motherson Sumi is expected to witness yet another challenging quarter, as its operating margin is likely to remain under pressure owing to ramping up of new plants in Brazil and Hungary and due to consolidation of low-margin Peguform operations. However, the standalone performance will benefit from normal production at its major client, MSIL. We expect EXID to continue to report improved performance sequentially, as revenue growth will be driven by increased 4W battery volumes and uptick in inverter batteries. We expect qoq expansion in the company's operating margin on the back of softening lead prices (down ~20% yoy) and better product mix. As a result, PAT is expected to jump by ~25% sequentially. Led by healthy PV and CV sales, APTY is likely to register a strong ~19% yoy increase in its top line. EBITDA margin is estimated to improve by 50bp qoq to 10.4%, as natural rubber prices have declined by ~6% qoq.
We expect Bharat Forge to report strong top-line growth of ~22% yoy, driven by healthy growth in the CV sector and aided further by its diversified business model (one-third of revenue from non-auto business); operating margin of the company is expected to improve with easing commodity prices, leading to ~17% yoy growth in net profit. Outlook: We believe long-term structural growth drivers of the Indian automobile 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 13-14% CAGR in auto volumes over FY2012-14E. As such, we prefer stocks that have strong fundamentals, high exposure to rural and exports markets and command superior pricing power. Against the backdrop of likely easing of interest rates, we expect demand revival in the 4W segment. Hence, we remain positive on AL, MM and TTMT.
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