Auto and auto ancillary: Q4FY11 Result Preview: ICICI Securities

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Auto and auto ancillary

􀂃 Demand growth tempers due to base effect, OEM growth positive

This quarter completed a robust year of volume growth (~27%

YTD) with ~21% YoY and ~4.4% QoQ. The PV and two-wheeler

segment has grown ~24.1%, 27.7% YTD, respectively, in FY11.

With increasing pricing power, OEMs have undertaken pricing

actions in Q4 ranging from 0.5-2.0% to offset costs pressures. This

has not dampened demand. There have also been initial indications

of increasing dealer inventory with interest rates and costs.

However, we will wait for Q1FY12 volumes to take a call on demand

sustenance. The CV segment has continued to see healthy growth

of ~17% YoY supported ably by year-end purchase. Though input

side pressures remain high, we remain positive on volume outlook

led by expected pick-up in infra-related activities in FY12. Tata

Motors would remain our top pick among OEMs. We expect our

OEM universe to have a topline growth of 23.3% YoY for Q4FY11E.

􀂃 Ancillaries to post a mixed bag of results

Ancillary manufacturers (ex-tyres) have been beneficiaries of strong

OEMs sales along with active replacement market. It would see QoQ

growth even as RM prices remain high. Tyre manufacturers,

however, have to deal with life-time high rubber prices (up 18%

QoQ) leading to significant erosion in profits even after hiking prices

(3-6% in Q4). Diversified suppliers like Bharat Forge would continue

to remain best bet in ancillary space. We expect our ancillary

universe to post revenue growth of 20.9% YoY in Q4FY11E.

􀂃 Input costs an overhang on profitability as forex volatility subside

The industry is facing the heat in terms of persistently rising

commodity prices like steel (15% QoQ), aluminium (7% QoQ) and

rubber (18% QoQ). The outlook towards the commodity up-cycle

waning in the near term remains a not so distinct possibility. On the

positive front, however, forex volatility (JPY, USD and GBP) seems

to have eased. We expect it to have a neutral to positive impact on

OEMs and suppliers. We expect I-direct coverage universe to reflect

a jump in EBITDA of 22.2% YoY and PAT jump of 6.6% YoY.

Company specific view

Company Remarks

Automotive

Axle

It is expected to post a topline growth of 17% YoY as CV demand remained robust in

Q4FY11. Rising input costs would, however, cause EBITDA and PAT margin to

decline by 300 bps, 160 bps YoY to 11.6% and 5.8%, respectively

Apollo Tyres Topline growth is expected to be 20.0% YoY accentuated by price hikes undertaken

in Q4 along with ~19% YoY volume growth in auto sales. The Chennai facility is

expected to ramp up production further. However, ~18% QoQ rise in rubber prices

would cause margins to be under pressure

Bajaj Auto Discover, Pulsar series contributed ~71% of total sales. However, volume was flat

QoQ at 9.5 lakh. It recently launched Discover 125 cc and set overall sales target of

4.6 million in FY12E. Topline, bottomline are expected to grow 25.7% and 20.3% YoY,

respectively. Due to RM pressure, margins may drop ~50 bps QoQ

Balkrishna

Industries

Resurgence in farm equipment and OTR segment with recovery in the US is

expected to lead a topline growth of 25.3% YoY. The rolling low cost inventory of

rubber at $3.8/kg (44.8% less to market rate) for Q4 along with niche segment

pricing power would make it the least affected tyre play with~8.5% PAT margins

Bharat Forge Strong domestic M&HCV and LCV segment led automotive performance and rising

revenues of non-auto are expected to lever topline up ~51.1% YoY. The increasing

technology intensive non-auto traction is expected to continue, going forward. This

would help support margin growth on EBITDA and PAT

Escorts H1SY11 saw robust volume growth of 20.7% and is expected to end SY11E with

~18% YoY growth. The Union Budget increased farm credit allocation for this fiscal.

This would further support tractor sales. Completion of the Tanzanian order would

bring trading costs down to pre Q1SY11 levels and improve margins

Exide Revenues are expected to rise 11.5% YoY on the back of automotive volume growth

of ~19% YoY. Q3 saw a loss of sales and margin decline in the replacement market

due to supply commitments towards OEMs. However, with operational constraints

easing, higher replacement sales could lead to margin improvement

Hero Honda Volumes grew 22.6% YoY in Q4. This would increase the topline by 27.2% YoY.

However, RM cost rise, along with increasing ad & selling expenses has pushed

profitability down. EBITDA margins are expected to be ~11.1%, down 620 bps YoY.

Honda has completed its exit from the JV in March

JK Tyre The Chennai facility has added fresh 2 lakh TBR capacity. With strong PV, CV

demand revenue increase would be ~20% YoY. Rubber prices have increased 18%

QoQ having crossed $5.5/kg leading to a steep decline in margins on the PAT front

leading to ~sub 1% PAT margins

M&M Continued dominance in the UV segment and increasing market share (~20%) in sub

1-tonne LCV aided by robust rural tractor sales are expected to raise the topline by

23.8% YoY. It has completed acquisition of SsangYong and is looking at aggressively

harnessing its potential in the exports, domestic market

Maruti Suzuki Volumes grew 19.5% YoY, 24.8% YTD driven by largest selling models like the Alto

and Swift family. It undertook a price hike in January 2011 of up to 2.4%, aiding

revenue growth of 18.6% YoY. The Japan disaster had raised Yen concerns as Maruti

had an open position. However, now it is at ~85 (US$/JPY)

Motherson

Sumi

Domestic revenue growth continues to be robust with positive auto demand.

Business outside India is recovering with increase in sales in the US and China. The

consolidated sales would jump 18.5% YoY. However, copper prices have risen 12.8%

QoQ. Hence, we expect EBITDA margin to decline ~70 bps QoQ

Subros Themarket share of ~65% due to premier clients like Maruti and Tata Motors along

with growing business from newer entrants has improved the business outlook.

Revenue growth is expected at 26.1% YoY. Margins will remain flat QoQ

Tata Motors On the standalone front, CV segment volumes grew at ~14% YoY while PV sales

were up ~9.9% YoY. On the subsidiaries front, we have factored in a JLR retail

volume growth of 12.0% QoQ. On a consolidated basis, we expect it to witness

~12.5% QoQ topline,10.9% QoQ bottomline growth

Source: Company, ICICIdirect.com Research