Auto Sector Update - Earnings preview: September 2012 quarter :: BRICS Research

Auto
September 2012 quarter earnings preview


We expect auto companies under our coverage to report a growth of 8% yoy in
revenue  (down  7%  qoq,  mainly  due  to weak demand) and a flat growth in
earnings  (down 10% qoq). The sector is witnessing demand pressures, though
earnings  will  be  supported  by  four-wheelers  (up  6% yoy). Margins are
estimated  to decline marginally by 8bps yoy and 35bps qoq to 12.4%, mainly
due to a drop in volumes.

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The  revenue growth of 8% yoy is one of the lowest in the last three years.
Volumes of most of the segments—M&HCV, tractors, cars and two-wheelers—have
been  declining  due to the economic slowdown. LCVs and UVs are expected to
be  the only two segments to record a yoy growth in Q2FY13. Low IIP levels,
rising  inflation,  high interest rates and slow growth in real income have
impacted    demand  in the auto sector. Among the companies in our coverage
universe,  we expect M&M and Tata Motors to deliver the best performance in
Q2FY13  with  an earnings growth of 16% yoy and 6% yoy respectively. Bharat
Forge is estimated to report an earnings growth of 6% yoy, while Escorts is
expected  to  go  against  the  growth  trend  in  the tractors industry by
recording  an  earnings  growth of 200% yoy. Other companies, such as Ashok
Leyland,  Bajaj  Auto,  Hero MotoCorp, Maruti and TVS Motor are expected to
record a yoy decline of 38%, 6%, 18%, 5% and 63% respectively in earnings.

Four-wheelers:  Low IIP levels, high interest rates and slow growth in real
income  have  been  impacting  the  four  wheeler segment, which reported a
volume  growth  of  3%  yoy (down 3% qoq) in Q2FY13. Ashok Leyland’s strong
volume  growth  of  26%  yoy  was supported by sales of LCV Dost, while the
volume  growth  of  9%  yoy by Tata Motors (supported by Evoque), 8% yoy by
Escorts  and  (5% yoy) by M&M was driven mainly by an excellent performance
in  the  UV  space.  We expect the four wheeler segment to record a revenue
growth  of  13% yoy (down 6% qoq) and an earnings growth of 6% yoy (down 9%
qoq, mainly due to weak demand in Q2FY13. We expect the margins of the four
wheeler  segment  to expand marginally by 23bps yoy to 11.7%, mainly due to
the contribution of Tata Motors and M&M.

Two-wheelers:  In Q2FY13, the segment recorded a decline of 13% yoy and 12%
qoq  in  volumes,  due  to increased fuel prices and higher interest rates,
which  impacted  domestic demand. The leader in the segment, Hero MotoCorp,
reported  a decline of 14% yoy in volumes for Q2FY13, followed by a decline
of  10%  yoy  and  20%  yoy by Bajaj Auto and TVS. We expect the segment to
record a decline of 12% yoy in revenue (up 11% qoq) and 14% yoy and 13% qoq
in earnings.

Within the overall auto space, we are positive on M&M and Tata Motors.




 Regards,
 BRICS Research