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Automobile & Auto Ancillary - Results Preview - Strong Results on Healthy Volume Performance in 3QFY21 - Reliance Securities

Posted On: 2021-01-12 03:52:08 (Time Zone: Arizona, USA)


Automobile industry delivered a healthy volume performance in 3QFY21 with strong sequential improvement and decent YoY growth in most segments despite higher COVID cases. Incremental opening up of economic activities following series of unlocking, pent-up demand, healthy festive demand and improving sentiment across country resulted into strong sales during the quarter. Notably, the PV and Tractor industry witnessed a healthy improvement in sales volume both on QoQ and YoY basis with double-digit YoY growth in 3QFY21. Retail sales were higher due to Dusshera & Diwali festivities coupled with faster revival of urban markets. Relative ease on components supply front also supported production and wholesale dispatches. Inventory level across automobile segments remained at close to normal level at the end of 3QFY21. Discounts were under control due to limited supply and higher demand. Moreover, tight cost control measures and economy of scale would negate the adverse impact of higher RM cost to some extent. However, sharp run-up in commodity cost would impact overall margin performance of the auto companies despite high scale.

Within the automobile segment, the CV segment endured the worst impact with double-digit YoY fall due to very low utilisation and slow pick-up in construction activities despite sequential improvement. 3W segment also witnessed sharp decline like that of the CV segment. However, PV and tractor segments are clear outperformer with healthy double-digit growth. We expect the companies having higher exposure to overseas markets to report relatively better performance owing to faster recovery in global auto sales, while in domestic market the companies with higher replacement business are better-placed, as sizable pent-up demand was supported by healthy festive sales in 3QFY21. Further, the tyre manufacturers are expected to witness better traction due to higher replacement demand despite gradual improvement in OEM sales.

Result Expectations

The auto companies under our coverage universe are expected to witness 19% YoY growth (up 38% QoQ) in revenue, while higher RM cost would impact the profitability of most companies despite better scale. EBITDA margin of the coverage universe is expected to expand by 104bps YoY (flat on QoQ basis) to 12.2%, while PAT is expected to increase by 39% YoY due to healthy volume and sharp improvement in JLR's financials. We expect PAT of our auto coverage universe (ex-TTMT) to grow by 20% YoY, while TTMT is expected to report higher quarterly profit.

Within the automobile space, OEM and auto ancillary companies with higher CV exposure are expected to report decent quarterly profit. Higher profit is expected for Tata Motors (TTMT) due to turnaround of JLR business and improvement in standalone business. On the other hand, PV and 2W makers would report sizable profitability. JK Tyres (JKT) is seen as an outlier with strong 488% YoY growth in net profit to Rs613mn.

We expect Bajaj Auto (BAL) to report double-digit PAT growth due to strong exports, favourable exchange rate and effective tax rate (ETR). We also expect Mahindra & Mahindra (MM) and Escorts (ESC) to deliver decent performance due to better tractor volume. We except Hero MotoCorp (HMCL), Apollo Tyres (APTY) and Bharat Forge (BHFC) to report lower double-digit growth in net profit in 3QFY21, while Maruti Suzuki (MSIL) and CEAT are expected to report higher growth in net profit due to better rural traction. All other companies within our coverage universe like TTMT, Ashok Leyland (ALL), JK Tyre (JKTL) and RK Forgings (RKFL) are expected to report healthy double-digit growth in net profit. TTMT is expected to report Rs32bn net profit (vs. Rs6bn net loss in 2QFY21) due to JLR's strong sales performance across geographies. While TTMT is expected to see sizable financial improvement on account of margin improvement at JLR, noticeable improvement in standalone CV volume and healthy PV sales at India operations would also result in healthy operating margin for the standalone entity as well.

Our View: We expect the automobile industry volume to witness steady improvement across segment in FY22E, while strong YoY improvement would be seen in 4QFY21E due to low base. We expect volume to continue to get benefitted from strong rural economy amid healthy agri output and favourable monsoon along with recovering urban markets. From this level, we believe that CV segment would outperform the industry, while within the very segment, M&HCV would stage strong bounce back with ~150% YoY growth in FY22E. Therefore, we remain constructive on the automobile sector and remain very positive on M&HCV segment within auto space.

Top Pick: Ashok Leyland, Bharat Forge and M&M

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Source: Equity Bulls

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