Auto sector to exit FY16 on a high

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The auto sector is set for good tidings this earnings season, on the back of strong volume growth in the fourth quarter. Barring a few companies, earnings of most automobile companies are set to soar, say analysts. The Street expects automakers to report year-on-year revenue growth of 7-9 per cent in the March quarter, driven by healthy volumes.

Commercial vehicle (CV) manufacturers will outshine others this season, as volume growth of medium and heavy CVs has been robust in the March quarter driven by high replacement demand ahead of the BS-IV deadline. Also, the demand for light commercial vehicles is picking up. According to Edelweiss Securities, the medium and heavy commercial vehicles (M&HCV) segment sustained a healthy pace with Eicher Motors/Ashok Leyland/Tata Motors logging strong growth of 41 per cent, 34 per cent and 25 per cent year-on-year (y-o-y), respectively. As a result, most companies would report healthy improvement in margins driven by better operating leverage and better product mix.

The trend is similar for two-wheelers, too, which continue to see healthy scooter sales and modest motorcycle sales. The two-wheeler sector has come close to double-digit volume growth after several quarters. Bajaj and Hero MotoCorp are expected to report hefty margin expansion (estimated 350-basis point y-o-y margin expansion) during the quarter.

In contrast, passenger vehicle sales remained subdued with Maruti Suzuki reporting a y-o-y volume growth of four per cent. Analysts expect the passenger vehicle segment to report modest revenue and profit growth because of the high base effect.

Maruti’s profitability might also be impacted because of production loss on account of the Jat agitation, weak rural demand, and heavy discounting. Adverse currency movement is also likely to impact the earnings of the country's largest passenger car maker.

Mahindra & Mahindra has gained from the pick-up in sales of utility vehicles thanks to new launches. M&M’s auto segment volumes jumped 14 per cent while tractor volumes grew 12 per cent y-o-y on a low base. Reliance Securities expects all auto companies, except Maruti, to register y-o-y expansion in operating margin. Maruti is expected to register a 116-basis points y-o-y contraction in margin as volume growth has been limited and a large part of operating cost benefit has already been accrued.

Tata Motors is also expected to surprise on the upside as steady growth in sales of commercial vehicles will help bring down losses in the domestic business. Also, Jaguar Land Rover sales have not been impacted by the Chinese slowdown, which will further give a fillip to the firm’s performance. Religare Institutional Equities expects Tata Motors to post 100 bps of margin gains on high CV volume growth.

The company is looking at a net loss of Rs 9 crore even as its JLR business should do well, with estimated margin gains of 60 bps, quarter-on quarter, from strong volumes.

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