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Brokerages expect a subdued quarter for automobile companies due to strain on volumes and reduced profitability along with rising fuel costs.
Auto sales, too, have remained muted in December, which has added to the dampening sentiment. Challenges relating to tight liquidity and low buying sentiment continue to weigh on sales growth.
Here is a gist of what Kotak Institutional Equities and Motilal Oswal expect from Q3 performance of auto companies.
Brokerage: Kotak Institutional Equities
The research firm expects a soft quarter for auto companies. It expects revenue growth of 7 percent, while EBITDA could rise one percent and net revenue is seen rising 6 percent year on year.
“EBITDA margin will likely decline by 80 bps yoy due to increase in commodity prices and higher discount levels. Suppliers will have a relatively better quarter with revenue and EBITDA growth of 11% and 6%, respectively due to exposure to the steady and profitable aftermarket. Commercial vehicle and two-wheeler OEMs will particularly report weak results; earnings will decline for Maruti on a yoy basis,” analysts at the firm wrote in their report.
Commodity price fall impact
A positive effect of fall in commodity prices will be accrued to companies during the start of fourth quarter.
“We expect EBITDA margin of companies under our coverage to decline by 80 bps qoq in 3QFY19 due to (1) the lagged impact of increase in RM costs, (2) increase in discount levels due to softness in demand and (3) negative operating leverage,” the report added.
Weak quarter for CV and two-wheeler OEMs
Going forward, the brokerage expects EBITDA of Ashok Leyland/Eicher/Hero/Tata Motors standalone business to decline by 29%/5%/10%/31% due to weakness in volumes and reduction in profitability.
It expects Maruti’s EBITDA to decline by 14% yoy in 3QFY19 due to 1% yoy volume decline and 260 bps yoy decline in EBITDA margin. We expect JLR profit to improve by 19% yoy led by lower hedge loss and cost-reduction efforts.
Suppliers may have relatively better quarter
Kotak Institutional Equities sees auto component companies to report a relatively better quarter with 11% yoy revenue growth and 6% EBITDA growth in 3QFY19.
“This is due to exposure to the steady and profitable aftermarket. Further, battery companies such as Amara Raja and Exide will benefit from the recent decline in lead prices,” analysts at the firm wrote in the report.
For Maruti, it has cut FY19 EPS estimates by 4% due to lower volume assumptions but cut our FY20-21E EPS estimates by only 1% as we increase our EBITDA assumptions by 50 bps to factor in the benefit of recent decline in commodity prices and potential reduction in royalty expenses.
Brokerage: Motilal Oswal
The brokerage house expects operating margins to contract for second consecutive quarter.
It sees demand momentum across segments being hurt by increased cost of ownership led by
a) rising fuel costs
b) increase in insurance costs
c) higher cost of financing, as well as stress at farm level lead to the lowest festive sales
in past 4-5 years, particularly for two-wheelers and passenger vehicles (PVs).
However, it expects operating performance for most of the auto OEMs to bottom out in Q3FY19, as demand could normalize, led by factors such as softening in fuel prices, improvement in liquidity and new product launches.
Top picks
In autos, it prefers Maruti and Motherson Sumi among large caps, and Exide Industries among midcaps. They also like Mahindra & Mahindra as it is the best proxy for rural markets.
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