Semiconductor crunch may hurt automakers’ Q2 show

Analysts expect auto firms in Nifty50 to report ~399 cr loss against ~4,395 cr profit a yr ago

Automakers are expected to report muted earnings for the second quarter of financial year 2021-22 (Q2FY22) because of supply-side constraints like the shortage of semiconductors, brokerages say.

The average estimates of brokerages Motilal Oswal, YES Securities, IDBI Capital, and Phillip Capital show that while supply constraints weighed on passenger vehicle (PV) volumes, tepid domestic demand kept twowheeler sales in check.

As a result, the firms in the auto universe among the Nifty50 companies (including Tata Motors consolidated) are expected to swing to a year-onyear (YOY) loss of ~399 crore, against a cumulative profit of ~4,395 crore last year.

The loss will primarily be driven by Tata Motors, which is expected to report a loss of over ~4,000 crore in Q2. Its UK subsidiary, Jaguar Land Rover (JLR), has been affected by chip shortages. This, in turn, has dented the company’s volumes in a big way.

JLR’S retail sales in Q2 were 92,710 units, 18.4 per cent lower than the 113,569 vehicles sold last year, the company said in a statement on Monday. This a major decline for the firm, which clocked about 150,000 units in the pre-pandemic phase.

“The global semiconductor supply issue represents a significant near-term challenge for the industry, which will take time to work through,” Lennard Hoornik, JLR’S chief commercial officer, said in the statement.

Cumulative net sales for the universe in Q2 is estimated to advance 4.4 per cent to ~1.07 trillion from ~1.02 trillion a year ago.

A negative operating leverage (YOY) owing to lower volumes and persistent increase in raw material prices is also expected to hit the Ebitda (earnings before interest, tax, depreciation amortisation) margins of the firms.

YES Securities expects margins in the auto universe (excluding JLR) to contract 8.8 per cent in Q2, against 12 per cent contraction in the year-ago quarter. The YOY margin contraction is largely attributable to higher raw material costs — lead has risen by 24 per cent, copper 43 per cent, aluminium 55 per cent, and rubber by 1 per cent. Margins, including of JLR, are likely to contract 540 basis points YOY.

Other brokerages also expect the inflationary trend to have an adverse impact. “We expect the raw material headwinds to impact earnings in the second quarter of FY22. However, the same should improve going forward with commodity prices softening from the third quarter of FY22,” said a report by Axis Equities Research.

Meanwhile, even as demand for PVS and commercial vehicles (CVS) remained strong, the chip shortage deepened in August and September, resulting in production cuts and a volume impact of 40-45 per cent. Low inventory at the PV sales channels is likely to dampen festive season volumes.

Though weak domestic demand is set to crimp earnings of two wheeler-manufacturers, strong exports are expected to offset this to some extent. Two-wheeler sales declined around 11 per cent YOY in Q2, because of a high base on account of inventory filling last year. In comparison, exports saw strong 42 per cent YOY growth, driven by high demand and stable forex rates in African/latin American markets.

Emkay Global expects 23 per cent revenue growth for Bajaj Auto and 17 per cent for TVS Motor, while a decline of around 16 per cent is expected for Hero Motocorp, 4 per cent for Royal Enfield. Volumes are expected to pickup in the second half on improving macro numbers, positive rural sentiments and steady chip supplies, it said in a note.