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We expect auto companies in our coverage universe to post 24% yoy revenue growth in 3Q
FY12 – sector growth could be limited by muted performances from MSIL and TVS.
Sustained cost pressure is likely to impact margins; hence, we expect the sector to witness
slower 10% yoy earnings growth in the quarter.
We expect most companies to post strong earnings growth, except for MSIL and TVS.
Bajaj Auto and Maruti Suzuki remain our top picks
We maintain Underperform on HMC on expensive valuations.
All companies (except for MSIL and TVS) to post strong revenue growth – In 3Q, we
expect companies in our coverage universe to post robust 24% yoy revenue growth. Sector
growth would be impacted by the 22% revenue decline at MSIL and muted 7% yoy growth at
TVS Motor. Both the CV majors are expected to outperform sector growth with 39% yoy
revenue growth. Among two-wheeler majors, Bajaj Auto is likely to outperform with 21% yoy
revenue growth. Within PVs, we expect M&M to sustain its strong revenue momentum with
30% yoy growth.
Earnings growth to be a mixed bag – Input cost pressure is likely to remain flat qoq. Given
this, we expect sustained margin pressure on most companies. Bajaj Auto and Tata Motors
are likely to benefit from favourable currency movements. Ashok Leyland’s earnings growth at
138% yoy would be over a very low base. For Hero MotoCorp, steady volume ramp-up is
likely to be offset by rising ad spend; hence, margin is likely to remain stable. For M&M,
sustained cost pressure is likely to limit earnings growth to 9% despite strong revenue growth.
As for Maruti Suzuki, slower volume ramp-up and an appreciating Yen are likely to impact
earnings (we expect 63% yoy earnings decline). For TVS Motor, we expect margin to decline
led by an adverse product mix.
Valuation – Bajaj Auto continues to be our top pick given robust export momentum is likely to
drive earnings growth. We also like Maruti Suzuki for its attractive valuations. As for Tata
Motors, we like it given the revival in the domestic PV business, steady growth in CVs and
sustained momentum at JLR. These are likely to drive consolidated earnings growth – expect
the consensus upgrade cycle to continue post results. We have an Underperform on Hero
MotoCorp for its expensive valuations and an In-Line rating on M&M and TVS Motor.
3Q Auto Ancillary preview
In 3Q FY12, we expect companies within our coverage universe to post 32% yoy growth in
revenue driven by the steady demand from domestic OEMs, improved export offtake and
strong sales from the non-auto business.
Overall sector earnings is expected to remain muted in the quarter at 5% yoy primarily due
margin pressure at Exide (expect earnings to decline 28% yoy).
Bharat Forge is likely to outperform overall sector earnings growth.
Apollo Tyres and Bharat Forge are our top picks in the sector; we also like Amtek Auto for its
attractive valuations.
We have an In-Line rating on Exide Industries.
Key Highlights:
We expect the auto-ancillary space to post 32% yoy revenue growth (not comparable yoy) in
3Q driven by steady growth from OE / replacement segments as well as from the non-atuo
space. Given consolidation of Amtek India with Amtek Auto from 4Q FY11 onwards,
aggregate growth rates are not comparable yoy. Despite strong revenue growth, we expect
the ancillary space to post subdued 5.4% yoy earnings growth in 3Q (+25% qoq). Earnings
growth is likely to be limited by margin pressure at Exide Industries (estimated earnings down
28% yoy).
For Apollo Tyres, strong OE CV ramp-up and steady replacement demand are likely to drive
revenue growth in the India business (we expect revenue growth of 29% yoy to Rs18.4bn).
Furthermore, the impact of declining rubber prices is expected to be felt from this quarter
onwards. We hence expect margins to improve 220bps qoq to 9%. Also, a seasonally strong
quarter at Vredestein and steady performance improvement in South Africa are expected to
boost consolidated earnings qoq. Overall, we expect the company to post 3% yoy earnings
decline (+51% qoq growth) to Rs1.2bn.
For Bharat Forge, we expect steady ramp-up of the non-auto facilities to drive revenue growth
in the India business – we factor in 19% yoy revenue growth in 3Q to Rs9.2bn. Further, a
depreciating INR is also likely to boost margins – we factor in 50bps qoq margin improvement
to 24.2%. Overall, for the consolidated entity, led by a strong ramp up in the standalone
business as also a steady improvement in its overseas subsidiaries, we expect BFL to post
58% yoy earnings growth (+2% qoq) to Rs1.2bn.
Exide Industries is expected to be in revival mode after posting an all-time low margin in 2Q
(led primarily by market share loss in the replacement segment as well as inventory of high
cost lead). The fact that Exide still had some high cost lead inventory at the end of 2Q would
limit margin expansion even in 3Q. However, we do expect its performance to improve from
the lows of 2Q – we factor in 350bps qoq margin expansion to 11.2%. On account of
sustained cost pressure, we expect earnings to decline 28% yoy (+71% qoq) to Rs876m.
Driven by steady volume ramp up in both domestic and export markets and stable margins
qoq at 23%, we expect Amtek to post 17% yoy growth in earnings to Rs1.1bn in the quarter –
strictly not comparable yoy due to consolidation of Amtek India from 4Q FY11 onwards.
Valuation – Our top picks in the ancillary space are Apollo Tyres (Vredestein supporting
consolidated earnings) and Bharat Forge (revenue and margin expansion to be driven by nonauto
ramp-up). We also like Amtek Auto (attractively valued at 4.3x FY12E earnings). We
have an In-Line rating on Exide Industries as we believe current valuations adequately factor
in slower earnings ramp up.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We expect auto companies in our coverage universe to post 24% yoy revenue growth in 3Q
FY12 – sector growth could be limited by muted performances from MSIL and TVS.
Sustained cost pressure is likely to impact margins; hence, we expect the sector to witness
slower 10% yoy earnings growth in the quarter.
We expect most companies to post strong earnings growth, except for MSIL and TVS.
Bajaj Auto and Maruti Suzuki remain our top picks
We maintain Underperform on HMC on expensive valuations.
All companies (except for MSIL and TVS) to post strong revenue growth – In 3Q, we
expect companies in our coverage universe to post robust 24% yoy revenue growth. Sector
growth would be impacted by the 22% revenue decline at MSIL and muted 7% yoy growth at
TVS Motor. Both the CV majors are expected to outperform sector growth with 39% yoy
revenue growth. Among two-wheeler majors, Bajaj Auto is likely to outperform with 21% yoy
revenue growth. Within PVs, we expect M&M to sustain its strong revenue momentum with
30% yoy growth.
Earnings growth to be a mixed bag – Input cost pressure is likely to remain flat qoq. Given
this, we expect sustained margin pressure on most companies. Bajaj Auto and Tata Motors
are likely to benefit from favourable currency movements. Ashok Leyland’s earnings growth at
138% yoy would be over a very low base. For Hero MotoCorp, steady volume ramp-up is
likely to be offset by rising ad spend; hence, margin is likely to remain stable. For M&M,
sustained cost pressure is likely to limit earnings growth to 9% despite strong revenue growth.
As for Maruti Suzuki, slower volume ramp-up and an appreciating Yen are likely to impact
earnings (we expect 63% yoy earnings decline). For TVS Motor, we expect margin to decline
led by an adverse product mix.
Valuation – Bajaj Auto continues to be our top pick given robust export momentum is likely to
drive earnings growth. We also like Maruti Suzuki for its attractive valuations. As for Tata
Motors, we like it given the revival in the domestic PV business, steady growth in CVs and
sustained momentum at JLR. These are likely to drive consolidated earnings growth – expect
the consensus upgrade cycle to continue post results. We have an Underperform on Hero
MotoCorp for its expensive valuations and an In-Line rating on M&M and TVS Motor.
3Q Auto Ancillary preview
In 3Q FY12, we expect companies within our coverage universe to post 32% yoy growth in
revenue driven by the steady demand from domestic OEMs, improved export offtake and
strong sales from the non-auto business.
Overall sector earnings is expected to remain muted in the quarter at 5% yoy primarily due
margin pressure at Exide (expect earnings to decline 28% yoy).
Bharat Forge is likely to outperform overall sector earnings growth.
Apollo Tyres and Bharat Forge are our top picks in the sector; we also like Amtek Auto for its
attractive valuations.
We have an In-Line rating on Exide Industries.
Key Highlights:
We expect the auto-ancillary space to post 32% yoy revenue growth (not comparable yoy) in
3Q driven by steady growth from OE / replacement segments as well as from the non-atuo
space. Given consolidation of Amtek India with Amtek Auto from 4Q FY11 onwards,
aggregate growth rates are not comparable yoy. Despite strong revenue growth, we expect
the ancillary space to post subdued 5.4% yoy earnings growth in 3Q (+25% qoq). Earnings
growth is likely to be limited by margin pressure at Exide Industries (estimated earnings down
28% yoy).
For Apollo Tyres, strong OE CV ramp-up and steady replacement demand are likely to drive
revenue growth in the India business (we expect revenue growth of 29% yoy to Rs18.4bn).
Furthermore, the impact of declining rubber prices is expected to be felt from this quarter
onwards. We hence expect margins to improve 220bps qoq to 9%. Also, a seasonally strong
quarter at Vredestein and steady performance improvement in South Africa are expected to
boost consolidated earnings qoq. Overall, we expect the company to post 3% yoy earnings
decline (+51% qoq growth) to Rs1.2bn.
For Bharat Forge, we expect steady ramp-up of the non-auto facilities to drive revenue growth
in the India business – we factor in 19% yoy revenue growth in 3Q to Rs9.2bn. Further, a
depreciating INR is also likely to boost margins – we factor in 50bps qoq margin improvement
to 24.2%. Overall, for the consolidated entity, led by a strong ramp up in the standalone
business as also a steady improvement in its overseas subsidiaries, we expect BFL to post
58% yoy earnings growth (+2% qoq) to Rs1.2bn.
Exide Industries is expected to be in revival mode after posting an all-time low margin in 2Q
(led primarily by market share loss in the replacement segment as well as inventory of high
cost lead). The fact that Exide still had some high cost lead inventory at the end of 2Q would
limit margin expansion even in 3Q. However, we do expect its performance to improve from
the lows of 2Q – we factor in 350bps qoq margin expansion to 11.2%. On account of
sustained cost pressure, we expect earnings to decline 28% yoy (+71% qoq) to Rs876m.
Driven by steady volume ramp up in both domestic and export markets and stable margins
qoq at 23%, we expect Amtek to post 17% yoy growth in earnings to Rs1.1bn in the quarter –
strictly not comparable yoy due to consolidation of Amtek India from 4Q FY11 onwards.
Valuation – Our top picks in the ancillary space are Apollo Tyres (Vredestein supporting
consolidated earnings) and Bharat Forge (revenue and margin expansion to be driven by nonauto
ramp-up). We also like Amtek Auto (attractively valued at 4.3x FY12E earnings). We
have an In-Line rating on Exide Industries as we believe current valuations adequately factor
in slower earnings ramp up.
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