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Q3 preview: Automakers likely to post subdued sales, improved margins

As Maruti Suzuki kicks-off the third-quarter earnings season for automakers on Tuesday, most analysts expect the companies to report a subdued performance for the period under review amid muted demand leading to lower volumes and higher discounts. Based on the monthly sales figures, wholesale volume de-growth trend continued for the domestic automobile space largely due to weak economic growth, rising cost of ownership coupled with inventory correction by original equipment manufacturers (OEMs). Overall, volume declined around 13 per cent year-on-year during the quarter, amidst sharp retail uptick in the festive period.

Consequently, brokerage houses estimate that automakers may report, on average, around 5 per cent drop in sales and 8 per cent decline in bottom-line even though the performance is likely to be better on a sequential basis. On the margins front, benign raw material prices (steel, rubber) will aid gross margin recovery for most of the companies, the extent, however, limited by perils of negative operating leverage.

Companies that are expected to record steep fall in revenue as per reports include Ashok Leyland (down 34% YoY), Hero MotoCorp (down 13% YoY), and TVS Motor Company (down 12% YoY). Among the relative outperformers, Maruti Suzuki India is expected to report 9 per cent YoY growth in revenue, while Bajaj Auto may also report a 5 per cent growth.

Besides Maruti, analysts at IDBI Capital also expect Bajaj Auto (9%) and Eicher Motors (4%) to report volume growth on YoY basis. The brokerage firm said the slowdown in the auto segment in Q3FY20 would also impact the overall performance of auto ancillary companies.

As for the bottom-line, Sharekhan pegs net profit for the major automakers to drop by around 8 per cent while Prabhudas Lilladher expects a much larger 26 per cent dip. On the other hand, analysts at ICICI Securities expect automakers' profit after tax (PAT) to increase 3 per cent year-on-year which it attributes, in part, to transition to lower tax rate (25.2 per cent) for the quarter.

MARGIN EXPANSION LIKELY

According to Prabhudas Lilladher, margins are likely to expand around 60-80 basis points (bps) for major firms, led by benefit of soft raw materials which would be partially offset by higher discounts and weak product mix. DBS expects margins to expand 90bps YoY for major firms on a low base, softening input prices and cost-reduction measures. Tata Motors (200 bps YoY), Bajaj Auto (110 bps) and Maruti Suzuki (100 bps) are expected to report strong margin performance. Companies that are likely to register a steep decline in margins are Ashok Leyland (-440bps), Eicher Motors (-320bps), Escorts (-110bps) and Exide (100bps).

THE ROAD AHEAD

Going forward, a general slowdown in the economy, increase in vehicle prices, BSVI transition, liquidity conditions and low buying sentiment among customers would continue to impact four-wheeler and two-wheeler retail sales, IDBI Capital said in a note. Those at BNP Paribas are 'cautiously optimistic' on the sector for the year 2020, but rule out a significant improvement in the year ahead.

"In Q1FY21, pre-buying is expected to happen but auto manufacturers may be forced to resort to discounting in order to clear BS-IV models, given the weak demand conditions. As the BS-VI emission norms are implemented effective April 1 2020, prices of all BS-VI models are estimated to rise.This has the potential to keep demand suppressed for a quarter or two in our view," said Abhijeet Dey, a senior fund manager for Equities at BNP Paribas




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