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Auto sector preview: High fuel prices to potentially impact growth

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Auto sales in India have been on the fast lane since the implementation of goods and services tax (GST) in July 2017, thanks to an increase in consumer spending coupled with exciting launches by the industry and a buoyant rural economy. Automobile sales volumes have grown steadily in the last three quarters, albeit on a lower base. However, renewed interest by buyers and original equipment manufacturers (OEMs) has led to hefty expectations on Dalal Street with Nifty Auto Index being one of the top performing indices of FY18.

In comparison to the financial year 2018-19 (FY18), FY19 has got off to a steady start with Q1 automobile sales showing a 15 per cent year-on-year (YoY) growth, even if on a low base (anticipation of GST), and quarterly volumes growing at 6 per cent. A significant contributor (given the base) to the sales has been the passenger car segment, registering a growth of 20 per cent YoY driven by Maruti Suzuki (24 per cent YoY). Commercial vehicles, too, continue to shine with both Tata Motors and Ashok Leyland continuing their double-digit volume growth (30 per cent YoY).

We believe auto sales is on steady start in FY19 and ride from here on will be driven by individual models and the ability of OEMs to attract consumers. Maruti Suzuki is our top pick in passenger vehicle (PV) segment, as top models Baleno and Brezza continue to sell like hotcakes and waiting period remains strong (45 to 80 days) for these two models. Newly launched Swift and Swift Dzire also continue to live up to the name. For Q1FY19, we expect Maruti’s sales to rise 14 per cent YoY and EBITDA margins to remain between 14.5 per cent to 15 per cent. Bajaj Auto, on the other hand, is our top pick in the two-wheelers segment, taking into account strong revival in the export market and improving sales. Bajaj Auto, which has industry’s best EBITDA margin (20 per cent) should sustain the hike in input prices unlike other players. However, Hero Motorcorp should also post healthy sales volume on the back of strong the rural presence, while TVS Motors continues to struggle in generating strong EBITDA margins.

We also remain positive on Ashok Leyland in commercial vehicle (CV) space considering its continued healthy volume growth (48 per cent YoY in Q1FY19), improving construction activities and as GST continue to benefit the truck markers. We expect Ashok Leyland’s profit growth to remain steady with some basis point decline in EBITDA margins.

For Tata Motors, we remain cautious as global trade wars continues to hang on the performance of Jaguar Land Rover (JLR.), while Eicher Motors’ immediate growth trigger seems to be factored in the stock price.

While, the automobile companies should post strong results in Q1, we remain cautious over high fuel prices, which may potentially impact growth in coming months and slow progress in monsoon may impact rural demand. Rising input cost also signals caution on the operational performance of these companies. However, given the earnings visibility overall we remain positive on the sector in the medium to long term. />
Ankit Merchant is research analyst - institutional equities at SMC Global Securities.

Disclaimer: Views expressed are personal. They do not reflect the view/s of Business Standard.