Automobiles Sector: Q3FY14 Results Preview

The automobile sector continues to face various roadblocks. High interest rates, a slowdown in the economy and the hike in fuel prices has definitely dented the demand of automobiles in the past one year.

For the quarter ended December 2013, the commercial and passenger vehicles segment are expected to continue with their lacklustre performance in terms of numbers. Tractor and two-wheeler, however, will reflect a strong demand from the rural market due to a better monsoon season.

Depreciation in the INR along with the price hikes taken by JLR will help Tata Motors to post sales growth in the higher teens. A better performance from Tata Motors, primarily led by robust performance by Jaguar Land Rover (JLR) and a good show by two-wheeler companies, will help the auto sector to post aggregate sales growth between 16%-18% on a yearly basis and 6%-7% on a sequential basis. Maruti Suzuki (MSIL) and Hero MotoCorp are also expected to see strong yearly growth numbers on account of the festival demand. 

The EBIDTA margins of auto companies are expected to improve by approximately 2% YoY. This will be mainly driven by the performance of two-wheeler companies, M&M (good tractor sales), MSIL (following the merger of Suzuki Powertrain India) and a strong performance from Tata Motors (led by JLR). This would be despite the increase in commodity prices. Nonetheless, companies like Ashok Leyland will see their margins declining due to higher discounting and adverse impact of their operating leverage.

The net earnings of auto companies on aggregate basis are likely to see a healthy yearly growth of more than 30%, driven by the numbers of MSIL, Tata Motors and Eicher Motors. The companies may, however see a drop in their net profits on a sequential basis. Depreciation of the Japanese Yen against the USD will help both Hero MotoCorp and MSIL to post higher profit figures. It is believed that all the companies barring Ashok Leyland are expected to post profit growth on a yearly basis.

Going forward, the demand environment for the auto sector (except two wheelers and tractors) will continue to remain sluggish for the next quarter at least. We may see the situation improving for the sector as the economy picks up going forward.