Aniket Mhatre, Institutional Research Analyst, HDFC Securities.
Margin pressure to be lower than earlier envisaged Q1 margin pressure likely to be lower than earlier envisaged We refrain from comparing YoY numbers, given the low base of last year and, hence, compare numbers on a QoQ basis for all companies. We expect most OEMs to witness higher input cost pressure QoQ, given the lag impact of commodities. However, given the sharp fall in few commodities in the quarter, the impact is likely to be much lesser than earlier envisaged, as few OEMs have managed to renegotiate their pricing contracts with their vendors in Q1. Within OEMs under our coverage, we expect EBITDA margin to decline by an aggregate 140bps QoQ in Q1FY23. Accordingly, we expect PAT for the sector to decline 23% QoQ.
Outliers expected within our coverage universe in Q1: We expect M&M to be the best performer in Q1, with an estimated 41% growth in earnings QoQ. This strong performance is likely to be driven by a sharp shift in mix towards its high-margin tractor segment (44% of total in Q1 from 32% QoQ). Even auto volumes have remained stable QoQ, given the strong order backlog and chip shortage impact gradually reducing. Hero MotoCorp is also expected to deliver 10% earnings growth QoQ, largely driven by 17% QoQ volume growth on a low base, as rural demand has picked up QoQ. On the other hand, we expect TTMT to post INR20bn loss in Q1 (INR1.6bn loss on an adjusted basis in Q4) due to weaker geographic mix and the drawdown of RR Sport.
Q1 estimates for ancillaries: At the moment, we only have two ancillary companies under coverage. Within these, we expect BHFC to post 50bps margin expansion QoQ as impact of input cost pressure is expected to be more than offset by benefits from improved mix and favourable currency. However, we expect Apollo Tyres' margin to remain under pressure due to higher input costs QoQ and Q1 being a seasonally weak quarter in Europe.
Key factors to watch out for in Q1 management commentary: We would critically look out for guidance on the below from management post results: (1) industry demand outlook, both rural and urban, and if there is any visible impact of the current inflationary pressure; (2) normalcy in supply constraints; (3) when would the benefit of softening input costs start reflecting in financials; (4) feedback on geopolitical turmoil: any impact of possible US recession, rising operational costs in Europe, and economic outlook in some emerging economies like Africa.
Valuation and view: Based on volume revival and softening of input costs in Q1 well ahead of our estimates, we have raised our earnings estimates for a few companies (see fig4). We haven't changed any of our recommendations at this stage. We continue to have BUY ratings on Hero MotoCorp, TVS Motors, and Mahindra and Mahindra within OEMs and Bharat Forge within ancillaries. We have ADD ratings for Eicher Motors, Maruti Suzuki, and Apollo Tyres. We have raised our target multiples for both Hero MotoCorp (to 15x FY24 from 14x) and TVS Motors (28x FY24 from 27x) and they are now in line with their respective historical averages; we see no need to assign a discount on the same.