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Auto sector Q4 earnings preview: Muted revenue, drop in EBITDA margin seen

Automobile companies have shifted to low gear and demand has flattened across the board. NBFC crisis, followed by lower off-tick of volumes and increasing competition has taken a major toll on automobile original equipment manufacturer (OEMs). Major dealers across the country have been burdened with high inventory prompting OEMs to re-align their production. Going ahead, two-wheelers face a hefty task to push sales while they look to comply with the anti-lock breaking system (ABS), combined breaking system (CBS) norms, which will lead to some rise in cost.

 
While private vehicles (PVs) have been facing stiff task with dealers across geographies grappling with higher inventory, commercial vehicles (CVs) are seeing some revival led by fresh disbursal by NBFCs. Competition has risen intensely in two-wheeler space since Bajaj Auto Ltd entered the entry level segment aggressively. The overall scenario for two-wheeler OEMs continues to be in a negative zone since Q2FY19 as it battled higher insurance cost and flattening demand. OEMs' failure, however, to push sales and not re-align inventory led to higher stock piling at dealer’s end. While most of the OEMs undertook price hike in Q4FY19, they were nullified against higher discounting at retail level.

 
While the pain of lower demand continues to hamper OEMs, mandatory implementation of ABS and CBS regulation is further likely to have bearing on OEMs. Hence, we expect Q4FY20 to largely remain muted on revenue front. EBITDA margins, on back of higher SGA, are also expected to decline by 50 bps QoQ. While Royal Enfield has been the biggest loser, Bajaj Auto has outperformed the overall two-wheeler industry in the quarter gone-by.

Absence of buying and lower participation from tier 2-3 cities and specifically from rural area has had an impact on volumes of passenger vehicles. OEMs, however, have followed an aggressive approach by launching various models and variants to attract the end-customer resulting into some movement in the inventory. In Q4FY19, we expect Maruti Suzuki to continue its leadership as Brezza continues to do well, while the new WagonR and Ertiga led to higher footfalls at dealerships hinting at slight revival in the coming months. EBITDA margin, however, is likely to be under pressure once again led by heavy discounting and thereby would be a key factor to watch-out for.

CVs were amongst the most impacted by liquidity crisis triggered post IL&FS issue. As all the CVs are financed through various financial institutions, it has been hit the most. While liquidity has played its part in curbing demand, real-estate projects and construction projects have also seen a considerable slowdown thereby impacting the incremental demand for CVs. While the months of January and February saw the most decline, March numbers have shown bit of an improvement on monthly basis. We expect a lean quarter for Ashok Leyland with muted revenue growth while EBITDA margins are expected to decline on the back of higher discounts.

 
The quarter gone by has faced many headwinds, much of which is already factored into the stock prices. However, revival still remains elusive for the auto industry. Post election, things are likely to improve on the ground as demand is expected to improve as monsoon is expected to bring in some cheer. Recent schemes to boost farm is also likely to produce better cash availability in the hands of rural India thereby driving the demand going ahead.

We prefer Hero Motorcorp in two-wheeler space, and continue to remain cautious in PV space, while in CV space Ashok Leyland is our top pick, with recent fall in stock price factoring major negatives.

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The author is a research analyst with SMC Securities. Views expressed are his own. 

 

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