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Subdued YoY Performance Expected with Volume Decline across Segments
Automobile industry delivered a highly subdued volume performance in 1QFY20 with double-digit volume decline for majority of the segments. Moreover, weak demand, distraction during central election, negative sentiment in rural market led to lower quarterly retail sales. We believe that higher monsoon deficit in few regions of South and West have impacted the rural consumption in past few months impacting rural auto sales in 1QFY20. PVs and 2W industry witnessed rough patch due to higher inventory at dealers’ end and low retail off-take. The CV segment has been getting impacted due to higher axle load norm which led to additional system capacity and temporary halt on construction projects during election period. We also expect the companies with higher exposure to overseas markets to report dismal performance on the back of slowdown in global auto demand. Moreover, intense competitive environment has resulted into higher incentives/discounts for 2W and M&HCVs, putting pressure on the companies’ margins. Though few companies hiked prices by 0.5-1% in 1QFY20, the hikes were not commensurate to cost inflation. The auto ancillary companies (tyre manufacturers) are expected to witness turbulence due to production cut by the OEMs and inventory de-stocking. However, replacement demand would benefit their performance to some extent in 1QFY20.
We expect the auto companies under our coverage universe to witness a 7.5% YoY decline in revenue. Considering higher input cost, negative operating leverage and higher expenses due to discounts/ incentives, we expect the margin to contract on YoY as well as QoQ basis. We expect PAT of our auto coverage universe (ex-Tata Motors) to decline by 25% YoY, while quantum of decline would vary from 2% to 48%.
Our auto coverage universe (ex-Tata Motors) is expected to report 25% YoY and 20% QoQ decline in PAT. Including Tata Motors, the PAT of our coverage universe is expected to fall by 30% YoY and 55% QoQ). On YoY basis, we expect net profit of the Auto OEMs under coverage to decline by 30%, while the ancillary companies are expected to witness 28% YoY decline due to margin contraction. We expect Bajaj Auto (BAL) and CEAT to report marginal drop in PAT, while Ashok Leyland (ALL), Maruti Suzuki (MSIL), Escorts (ECS), M&M (MM), RK Forging (RFL), JK Tyre (JKTL) and Apollo Tyre (ATL) to deliver highly subdued performance with significant YoY drop in net profit. Tata Motors (TTML), with higher contribution from JLR, is expected to see sizable financial impact due to highly subdued JLR volume amid slowdown in its key markets coupled with double digit drop in standalone volumes.
Notably, its China volume – having higher weightage in profitability – was significantly impacted in 1QFY20 (~45% drop). We expect TTML to report Rs13bn consolidated net loss as against net loss of Rs15bn in 1QFY19 due to disappointing JLR performance. We expect the automobile industry to report muted volume performance in 1HFY20E, though it would improve in 3QFY20 with pre-buying ahead of BS-VI implementation. We expect marginal growth for FY20 across segments, while the industry is expected to witness cyclical downturn in FY21E. We maintain our cautious view on the sector. We believe that PV segment would outperform the industry over next 2 years due to low penetration, reducing product life-cycle, lower price hike due to BS-VI transition and faster up-gradation.
Top Picks: Maruti Suzuki
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