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Sharekhan Special
Q3FY2011 Auto earnings review
Q3FY2011 was one of the most challenging quarters for
the auto companies in the recent times. While volumes
were modest due to the lean season, the companies saw
a challenging operating environment. We have used
contribution per vehicle as the key measure to track
conversion profitability while keeping in view the
operating flexibility. We see Tata Motors, Bajaj Auto and
Mahindra and Mahindra (M&M) as the clear outperformers.
There has been no dearth of negative surprises led by
Exide Industries (Exide), Hero Honda, Ashok Leyland and
Subros amongst our coverage universe.
Volume driven revenue growth
The Q3FY2011 revenues of the automobile companies
under the Sharekhan universe were primarily driven by
volume growth. The net sales of the companies (active
and soft coverage) improved by 26.5% year on year (YoY).
However, the operating profit declined by 2.1% YoY due
to an across the board increase in costs. Certain
commodities like natural rubber rose by over 64% YoY. We
were also surprised by the muted price hikes taken by the
company. For instance, tyres - the price leaders a few
quarters ago, were the biggest laggards.
Higher other income, lower taxes moderated bottom
line impact
We observe that the profit after tax (PAT) grew by 14.5%
YoY, in spite of a decline in earnings before interest, tax,
depreciation and amortization (EBIDTA). This is on account
of higher other income, lower taxes (fiscal and research
and development [R&D] benefits) and higher capitalisation
on account of the ongoing capital expenditure (capex)
programs. Amongst the original equipment manufacturers
(OEMs), Tata Motors and Bajaj Auto outperformed our
universe while Greaves Cotton was the outperformer in
the auto-ancillary space.
Outlook for Q4FY2011
The automobile sector is witnessing a robust volume
growth in Q4FY2011. The same got reflected in peak
volumes during January 2011. Even commercial vehicles
picked up smartly which had remained stagnant in
Q3FY2011. More importantly, the industry took price hikes
in the range of 1-2%. We expect operating margins to
improve sequentially across the board in spite of
commodity price push as Q4 seasonally has the most
favorable operating leverage.
Valuation
We expect Apollo Tyres and Ashok Leyland to lead the
earning per share (EPS) growth in FY2012 on the low base
of FY2011. Capacity expansion, better utilisation due to
wage settlement and full effect of price hikes would be
positively felt for Apollo Tyres in FY2012. Ashok Leyland
on the other hand would benefit from higher localisation
at Uttrakhand.
However, keeping in view the quality of earnings on a
higher base, Bajaj Auto and M&M are the preferred bets
amongst the coverage stocks.
Q3FY2011 in a snapshot
Bajaj Auto and M&M have emerged as clear outperformers in the OEM space while Greaves Cotton dominated the auto
ancillary segment in our coverage universe. The negative surprises came from Hero Honda and Exide, which failed to
translate stellar top lines into earnings growth. Only M&M reported a higher YoY EBITDA growth as compared to sales
growth.
The PAT growth was higher than the EBITDA growth on account of higher other income, lower taxes (fiscal and R&D
benefits) and higher capitalisation due to the on-going capex programs.
Commodity prices playing spoilsport
We have mapped key commodity price movements with the sequential growth in raw material (RM)/sales of companies
in our coverage universe. The worst hit has been Exide which saw a 570 basis point sequential increase in RM/sales
due to higher lead prices followed by Apollo Tyres which saw a 220 basis point sequential increase in RM/sales.
Amongst the OEMs, M&M and Hero Honda felt the highest cost push sequentially.
Outlook and valuation
We expect Apollo Tyres and Ashok Leyland to lead the EPS growth in FY2012 on the low base of FY2011. Capacity
expansion, better utilisation due to wage settlement and full effect of price hikes would be positively felt for Apollo
Tyres in FY2012. Ashok Leyland on the other hand would benefit from higher localisation at Uttrakhand.
However, keeping in view the quality of earnings on a higher base, Bajaj Auto and M&M are the preferred bets amongst
the coverage stocks.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sharekhan Special
Q3FY2011 Auto earnings review
Q3FY2011 was one of the most challenging quarters for
the auto companies in the recent times. While volumes
were modest due to the lean season, the companies saw
a challenging operating environment. We have used
contribution per vehicle as the key measure to track
conversion profitability while keeping in view the
operating flexibility. We see Tata Motors, Bajaj Auto and
Mahindra and Mahindra (M&M) as the clear outperformers.
There has been no dearth of negative surprises led by
Exide Industries (Exide), Hero Honda, Ashok Leyland and
Subros amongst our coverage universe.
Volume driven revenue growth
The Q3FY2011 revenues of the automobile companies
under the Sharekhan universe were primarily driven by
volume growth. The net sales of the companies (active
and soft coverage) improved by 26.5% year on year (YoY).
However, the operating profit declined by 2.1% YoY due
to an across the board increase in costs. Certain
commodities like natural rubber rose by over 64% YoY. We
were also surprised by the muted price hikes taken by the
company. For instance, tyres - the price leaders a few
quarters ago, were the biggest laggards.
Higher other income, lower taxes moderated bottom
line impact
We observe that the profit after tax (PAT) grew by 14.5%
YoY, in spite of a decline in earnings before interest, tax,
depreciation and amortization (EBIDTA). This is on account
of higher other income, lower taxes (fiscal and research
and development [R&D] benefits) and higher capitalisation
on account of the ongoing capital expenditure (capex)
programs. Amongst the original equipment manufacturers
(OEMs), Tata Motors and Bajaj Auto outperformed our
universe while Greaves Cotton was the outperformer in
the auto-ancillary space.
Outlook for Q4FY2011
The automobile sector is witnessing a robust volume
growth in Q4FY2011. The same got reflected in peak
volumes during January 2011. Even commercial vehicles
picked up smartly which had remained stagnant in
Q3FY2011. More importantly, the industry took price hikes
in the range of 1-2%. We expect operating margins to
improve sequentially across the board in spite of
commodity price push as Q4 seasonally has the most
favorable operating leverage.
Valuation
We expect Apollo Tyres and Ashok Leyland to lead the
earning per share (EPS) growth in FY2012 on the low base
of FY2011. Capacity expansion, better utilisation due to
wage settlement and full effect of price hikes would be
positively felt for Apollo Tyres in FY2012. Ashok Leyland
on the other hand would benefit from higher localisation
at Uttrakhand.
However, keeping in view the quality of earnings on a
higher base, Bajaj Auto and M&M are the preferred bets
amongst the coverage stocks.
Q3FY2011 in a snapshot
Bajaj Auto and M&M have emerged as clear outperformers in the OEM space while Greaves Cotton dominated the auto
ancillary segment in our coverage universe. The negative surprises came from Hero Honda and Exide, which failed to
translate stellar top lines into earnings growth. Only M&M reported a higher YoY EBITDA growth as compared to sales
growth.
The PAT growth was higher than the EBITDA growth on account of higher other income, lower taxes (fiscal and R&D
benefits) and higher capitalisation due to the on-going capex programs.
Commodity prices playing spoilsport
We have mapped key commodity price movements with the sequential growth in raw material (RM)/sales of companies
in our coverage universe. The worst hit has been Exide which saw a 570 basis point sequential increase in RM/sales
due to higher lead prices followed by Apollo Tyres which saw a 220 basis point sequential increase in RM/sales.
Amongst the OEMs, M&M and Hero Honda felt the highest cost push sequentially.
Outlook and valuation
We expect Apollo Tyres and Ashok Leyland to lead the EPS growth in FY2012 on the low base of FY2011. Capacity
expansion, better utilisation due to wage settlement and full effect of price hikes would be positively felt for Apollo
Tyres in FY2012. Ashok Leyland on the other hand would benefit from higher localisation at Uttrakhand.
However, keeping in view the quality of earnings on a higher base, Bajaj Auto and M&M are the preferred bets amongst
the coverage stocks.
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