Q1 auto sector preview: Expect volumes to decline sharply, input costs to hurt margins

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The auto industry broadly encountered healthy demand conditions in Q1FY22, barring May, where state-specific lockdowns amid Covid resurgence played spoilsport. Analysts see the total industry volumes to have declined 33% sequentially, with the CV (commercial vehicle) space bearing the brunt of the drop-off and tractor space to have outperformed given supportive macroeconomics. The topline performance is expected to be slightly better than industry volume trends given broad-based price hikes but margins are seen declining across the board amid no respite in commodity cost inflation (metals, rubber, plastics).

Two-wheelers

Emkay Global in its research report has said that volumes for the segment declined notably at -29% CAGR in Q1FY22. “Volumes are likely to recover sequentially in Q2, supported by pent-up demand and the marriage season”, it added.

Bajaj Auto is largely expected to report a relatively steady performance in Q1FY22, however PAT and EBITDA are expected to decline.

Q1FY22 performance at Hero Moto is expected to be soft. Margin reading is seen taking a hit primarily on account of increase in employee costs and other expenses on percentage of sales basis

Eicher Motors is expected to report weak performance in Q1FY22. Rise in key commodity prices and negative operating leverage is likely to hit margins.

Passenger Vehicles

Emkay Global says that for the PV industry, volumes turned positive in Jun’21 on easing of lockdowns and a healthy order-book, and we expect growth to further improve ahead. It says Maruti Suzuki is expected to post revenue decline at -4% CAGR.

ICICI Direct suggests Maruti is expected to post soft Q1FY22 numbers. Volumes for the quarter declined28.2% QoQ to 3.53 lakh units but revenue decline is expected to be lower at 25% QoQ to Rs 18,026 crore.

“Tata Motors is expected to report muted Q1FY22 results tracking sequential weakness in volumes across India PV, India CV and JLR operations along with associated perils of negative operating leverage and additionally, higher raw material cost. We expect TML to post consolidated loss of Rs 1,663 crore in Q1FY22”, it adds

Commercial Vehicles

Emkay Global suggests the industry volume declined steeply at -24% CAGR in Q1FY22. “We expect revenue to decline at a CAGR of -24% for Eicher Motors-Volvo Eicher  and -30% for Ashok Leyland. We believe that volumes will gradually pick up on better macros, infra spending and replacement demand, going forward” the report said.

ICICI Direct on the other hand in the commercial vehicle space covers Ashok Leyland and expects it to post a loss at the EBITDA level of Rs 19 crore tracking negative operating leverage, with loss after tax seen at Rs 187 crore.

Tractors

For the tractor segment, Emkay Global expects volumes to decline in H2 due to high base and lower government subsidy support, leading to lower volumes in FY22E.

Escorts is expected to report a subdued performance in Q1FY22. M&M is expected to be among the better OEM pack performers in Q1FY22 on the back of a sequential increase in tractor volumes

Auto ancillaries

Emkay Global believes that battery companies such as Amara Raja Batteries and Exide Industries may witness revenue declines at -4% CAGR and -9% CAGR, respectively. In comparison, we expect companies with notable overseas exposure to do better, with CAGRs of +5% for Motherson Sumi.

ICICI Direct on the other hand says, with the OEM channel experiencing volume weakness in the quarter, we expect ancillaries with high exposure to replacement channel (tyre, battery players) to have fared relatively better. Further, Minda Industries is expected to outperform base user industries given its focus on kit value growth. The ancillary pack is seen posting 11.8% sequential revenue decline accompanied by 150 bps QoQ margin dip to 12.3%.

Top Picks

Overall, Emkay Global has a positive view on the automobile sector which is underpinned by expectations of a strong cyclical upturn which is expected to last at least three years.

Emkay Global mentions, “Our top picks among OEMs are Tata Motors, Ashok Leyland and Eicher Motors. In Ancillaries, we like Motherson Sumi and Apollo Tyres.

ICICI Direct has picked Mahindra & Mahindra from the PV and Tractor space as their preferred investment pick while they like Balkrishna Industries from the ancillary space ahead of earnings.