Auto sector's Q2 likely to be a mixed bag
Ashok Leyland, Eicher & Maruti to lead earnings momentum on higher volumes & lower costs
The second quarter has been a mixed bag for the automobile sector as volume growth has varied across different segments. Commercial vehicles have fared much better than two-wheelers or passenger vehicles, which is expected to result in upgrades for the former and downgrades for the latter. Demand recovery continued to be patchy for two-wheelers, except scooters, and tractors. Analysts expect the largest passenger car maker Maruti and commercial vehicle major Ashok Leyland to report the best quarterly revenue growth compared to others.
According to analysts, listed automobile companies will report a revenue growth of 910 per cent year-on-year in the September quarter. Maruti reported 12 per cent YoY growth in volumes while Ashok Leyland’s volumes grew 47 per cent YoY during the quarter. Not all original equipment manufacturers have witnessed double-digit volume growth. While twowheeler majors will see margin expansion due to lower input costs, volumes have remained tepid for most players. Despite volume challenges, operating incomes of all auto companies are expected to grow at a much higher pace during the quarter thanks to lower input costs.
Earnings growth for the sector is expected to be led by Ashok Leyland, Eicher and Maruti, while Mahindra & Mahindra and Jaguar Land Rover would lag, impacting parent Tata Motors. According to Religare Institutional Research, margins are likely to improve sequentially for most twowheeler players, but trends are expected to be mixed for fourwheeler companies with sharp margin expansion for Ashok Leyland. Emkay Global expects the highest Ebitda growth for Ashok Leyland (up 170 per cent), Eicher Motors (65 per cent), and Maruti Suzuki (44 per cent). These three companies are expected to fare better than the industry even if the recovery is slow. Maruti, on the other hand, is expected to report a marginal decline in margins sequentially, but an increase of 410 basis points year-on-year on better operating leverage.
Most two-wheeler players are expected to report a margin expansion thanks to lower commodity prices. Bajaj Auto is expected to benefit the most from lower input costs and currency tailwinds. Religare expects Bajaj Auto to report an 80 basis point margin expansion sequentially and 70 basis improvement for Eicher. Operating margins of TVS Motor are likely to expand margins by 30 basis points. Hero MotoCorp is expected to report flat margins sequentially as lower raw material costs would be offset by lower operating leverage.
Mahindra & Mahindra is likely to be an exception to this quarter, as it is likely to be hurt by lower volumes in the automotive segment and the sharp decline in the tractor segment. According to Karvy, a 26 per cent YoY decline in tractor volume and two per cent YoY decline in auto volume resulted in 11 per cent YoY fall in overall volumes. Coupled with this, an inferior product mix in automotive and lower tractor contribution would impact margin the brokerage adds.