IGI Logo

Q2 preview: Temporary volume issues and cost pressures likely to dent earnings

We expect aggregate revenue (ex-TTMT) growth of only 6% yoy in Q2FY22, as volume growth was affected by chip shortages in PVs and a high base in 2Ws/Tractors in the quarter. In comparison, CVs witnessed strong volume performance. Companies that are likely to see better performance include CV firms (AL, TTMT – standalone, EIM - VECV), 2W exporters (BJAUT, TVSL) and ancillaries (BHFC, APTY, EXID, AMRJ, MNDA).

* Domestic CV industry volumes grew strongly by ~24% yoy (almost reaching 2020 levels) on a low base. We expect robust revenue growth of 55-95% for OEMs such as TTMT-standalone, EIMVECV and AL. We expect strong growth in H2 as well on the back of improving freight availability and higher infrastructure spending.

* Domestic PV industry volumes rose marginally by ~2% yoy, as growth was limited by chip shortages. We expect revenue growth of 2% for MSIL and 14% for MM auto division (total revenue growth of 8% for MM). Led by the pending order book and improving chip supplies, we expect volumes to improve in H2.

* Domestic 2W industry volumes declined by ~11% yoy, owing to a high base on account of inventory filling last year. In comparison, exports saw strong ~42% yoy growth, driven by high demand and stable forex rates in African/Latin American markets. We expect revenue growth of 23% for BJAUT and 17% for TVSL, while we see a decline of 16% for HMCL and 4% for EIM-RE. We expect volumes to pick up in H2 on improving macros, positive rural sentiments and improving chip supplies.

* Domestic Tractor industry volumes fell 11% yoy. In terms of revenue, we expect a 3% decline for ESC and flat growth for MM farm division (total revenue growth of 8% for MM). Led by a high base and lower government subsidy support, we expect volumes to decline in H2.

* Tata Motors is likely to register 14% revenue growth, supported by a 94% surge in the standalone division. In comparison, JLR revenues may decline by 13% in GBP term. EBITDA margins should contract by 470bps, owing to lower margins in JLR. We expect a ramp-up in dispatches in both JLR and standalone divisions in H2.

* Ancillaries: BHFC should see robust revenue growth of 70%, driven by a pickup in the underlying CV industry and the overseas industrials segment. Companies that benefit from replacement demand such as EXID, AMRJ and APTY may see 10-15% revenue growth yoy. We expect MNDA to see 13% revenue growth, aided by growth in alloy wheels/sensor categories and improving content in other segments.

* Aggregate EBITDA margins (ex-TTMT) should contract 330bps vs. Q2FY21, affected commodity inflation and negative operating leverage. Regarding currency movement yoy, INR depreciation against EUR/GBP is positive for MSS/BHFC/APTY, and JPY depreciation is positive for MSIL/HMCL.

We retain a positive view on the auto sector, underpinned by expectations of a cyclical upturn. Our top picks are TTMT (TP: Rs400), AL (TP: Rs155), MSIL (TP: Rs8,600) and TVSL (TP: Rs780). In Ancillaries, we like MSS (TP: Rs300) and APTY (TP: Rs305). Key downside risks: delay in economic recovery, further increase in commodity prices and adverse currency movement.

To Read Complete Report & Disclaimer Click Here

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354

Above views are of the author and not of the website kindly read disclaimer