In the December quarter (Q3), the firm reported an 8 per cent fall in revenues. This was driven by the auto segment that fell an estimated 20 per cent, along with weakness in most of its sub-segments. Auto is the second-largest segment, accounting for about 38 per cent of revenues. Demand from auto makers is expected to be soft on the back of higher product prices, given the transition to BS-VI norms.
Even in the industrial segment (53 per cent of revenues), barring the railways and wind businesses, demand has been sluggish. The impact on operating profit (down 40 per cent year-on-year or YoY) and margins, due to inferior products, was even more severe. Reported Ebidta margins fell a steep 560 basis points to a 17-quarter low of 10.3 per cent, compared to brokerage estimates of 15 per cent.
A poor product mix, with a higher share of traded products, led to the weakness. A higher proportion of traded goods will keep margins under pressure in the near term.
The management is optimistic and expects the downturn to end, with recovery in revenues and margins coming in the next few quarters. Analysts are, however, cautious. Edelweiss Research believes a recovery in private sector capex, product launches, and growth in the aftermarket segment are key.
Analysts at the brokerage have cut their FY20 earnings estimates by 20 per cent, and those for FY21 by 17 per cent. The target price stands reduced at Rs 1,935 a share, from Rs 2,146 earlier. Given the current price of Rs 1,897, there is limited upside for the stock, which is trading at 30x its FY21 earnings estimates.