Auto - Q3FY15E Results Preview :: IndiaNivesh

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 Auto companies are expected to post muted set of numbers in Q3FY15 due
to muted volume growth. M&HCVs recorded the highest recovery on the back
of low base and the highest correlation to the macro improvement while LCV
sales continue to witness poor growth. In PVs, slight recovery was seen due
to improvement in consumer sentiment; however pressure was witnessed in
2W sales.
 However EBITDA margin is expected to improve YoY basis(~ 80 bps) across
our coverage universe due to better operating leverage and favorable currency
movement.
 Maruti Suzuki is expected to post strong set of numbers driven by higher
volume and favorable currency movement (the yen has depreciated by 13%
YoY and 7% QoQ vs INR). While M&M appears to be faced with a challenging
near-term environment in both its key segments, UVs and tractors.
 In two wheeler segment, we expect Hero MotoCorp’s margins to improve by
100 bps YoY due to favorable currency movement ( the yen has depreciated
by 13% YoY vs INR ) and lower royalty payment. For Bajaj Auto, we expect
margins to contract due to currency headwind (Despite higher realization in
Indian Rs ~ 62/ USD, sharp fall in Nigerian currencies affected the margins.
TVS to show stellar performance driven by strong volume growth (operating
leverage).
 Within auto ancillary, Exide would benefit from strong volume growth and
decline in lead prices. For Lumax Auto Q3FY15 is expected to be a little subdued
compared to the first two quarters mainly because of the number of working
days (company undertakes annual maintenance shut down in Dec.)
Outlook
 We believe there would be a short term impact of Excise roll back (2 to 3
months perspective) on auto sales. However, lower fuel prices, lower interest
rate and improving GDP should aid the recovery in automotive industry. We
believe good governance and faster reform would lead to higher employment/
disposable income that will improve consumer sentiment.
 Overall, we expect CVs to record the highest recovery on the back of low base
and the highest correlation to the macro improvement. We expect CV volumes
to increase above 20% YoY in FY16. In PVs, we expect an improvement in
consumer sentiment to aid 15% YoY growth in FY16 and FY17. Similarly, for
2Ws, we expect 12% YoY growth in FY16 and FY17. Within 2Ws, we expect
scooters to outpace motorcycles.
 We expect domestic passenger vehicle (PV) demand to bounce back in FY16
and deliver 15% CAGR over FY15-17 on the back of improving consumer
sentiment (due to economic revival) and moderating fuel costs and interest
rates. One feature of the demand slowdown over the last 2-3 years has been
the sharp decline in the proportion of entry segment car sales from 30% in
FY11 to 24% in FY14. Despite first-time buyers returning in the last 6-8 months,
the share of entry level cars has continued to slide (21% share in YTD FY15).
We expect growth for premium and compacts cars to remain strong, driven
by new launches.
 In the commercial vehicle segment LCV sales continued to show weakness
while M&HCV sales showed some sign of recovery led by an increase in the
replacement of old trucks (particularly by the large fleet operators) and to
the low base effect.
 We believe this positive outlook is more or less captured in consensus. The
recent rally in the auto sector stocks has led to most companies trading at
above or near their fair valuations, based on one-year forward multiples.
Considering these, we keep neutral stance on the sector.
 Top Picks: Bajaj Auto, Exide, Swaraj Engines and Lumax Auto Technologies.