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Last Updated : Apr 10, 2019 01:05 PM IST | Source: Moneycontrol.com

Auto sector Q4 preview: Profit expected to decline sharply, trend may continue till H2

Auto universe is expected to report a 28 percent YoY PAT decline on a modest base – a fourth consecutive quarter of double-digit PAT decline, Motilal Oswal said

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The auto sector may see a sharp decline in profits in Q4 after tepid sales in the last three months. Almost all auto company is facing the issue of high inventory level across the country.

This has resulted in production cut by many auto companies including Maruti Suzuki, Bajaj Auto, etc. in March.

"All auto segments faced demand headwinds in Q4FY19 – a trend similar to the previous quarter. Not only increased ownership cost but also stress at the farm level hampered buying sentiment, particularly in 2Ws/PVs. Consequently, inventories were at record levels across segments (highest in the 2-wheeler segment at 60-70 days)," Motilal Oswal said.

This is likely to reflect in earnings as well, which are expected to be worst among consumer discretionary and Nifty50 companies.

"Auto universe is expected to report a 28 percent YoY PAT decline on a modest base – a fourth consecutive quarter of double-digit PAT decline," Motilal Oswal said.

Even after excluding Tata Motors, the auto universe is expected to post PAT decline of 16 percent YoY, it added.

The brokerage expects EBITDA margin to shrink 180bp YoY to 11.4 percent, impacted by weak operating leverage and higher variable marketing spend.

"While almost all OEMs (except TVS Motor and Tata Motors South Africa) are likely to see YoY margin contraction, Maruti Suzuki, Ashok Leyland and Bajaj Auto are expected to deliver a QoQ margin recovery of 220bp, 80bp and 40bp, respectively," Motilal Oswal said.

Wholesale volume growth trends in March quarter have been weak, Jefferies said, adding higher discounts will hurt margin and profit in Q4.

Having Maruti as a preferred pick, Jefferies expects company's Q4 EBITDA to decline 10 percent YoY.

In the two-wheeler space, the global research firm expects Hero's EBITDA to decline 24 percent YoY and estimates 13 percent YoY fall in EBITDA for Eicher Motors.

"We see EBITDA declining 11 percent YoY for Bajaj Auto and see TVS' EBITDA to be 12 percent higher YoY," Jefferies said.

The brokerage expects 16 percent YoY decline in M&M+MVML EBITDA while Ashok Leyland's EBITDA may be sharply higher QoQ, but 13 percent Lower YoY.

"We expect 7 percent YoY EBITDA growth for Tata Motors' standalone business and EBITDA decline of 25 percent for JLR," it said.

Brokerages expect the muted trend to continue for some more months, but the second half of the current financial year could be slightly better. Hence they expect the year FY20 could be a mixed bag for auto space.

"We expect the demand environment to only improve from Q2FY20 with pre-buy to kick start ahead of BS-6 implementation; however, the strategy around BS4 inventory management in Q4FY20 will determine the overall FY20 performance," Motilal Oswal said.

The increase in regulatory cost to comply with BS6 emission norms is likely to take a toll on demand post FY20, as players will have to pass on the higher cost to consumers to tackle the consequent pressure on margins, it added.

According to the brokerage, the impact is likely to be significant on 2-wheelers and commercial vehicles but limited on passenger vehicles.

Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol advises users to check with certified experts before taking any investment decisions.
First Published on Apr 10, 2019 01:05 pm
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