Q1FY22 earnings show auto sector is likely to ride over disruptions

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The auto sector was on the receiving end due to a much widespread second wave of Covid 19 as it witnessed another tough quarter. Revenues for auto companies witnessed a revenue decline of 22.4% Q-o-Q, hampered by lockdown restrictions but were partially mitigated by continued exports. Apart from lockdown, the industry is also reeling shortage of semi-conductors, precious metals, and containers unavailability, which all-together impacted EBITDA (earnings before interest tax depreciation and amortization) margin sequentially.

According to an analysis by Sharekhan of select auto companies, the cumulative EBITDA margin saw a decline of ~240 basis points Q-o-Q to 9.4%, led by negative operating leverage and increased raw-material prices. “Companies continued to shift towards digitalisation, controlling of administrative costs, focus on core business, and expansion of business through product innovations during Q1FY2022,” said Sharekhan in a report.

Unlike OEMs (original equipment manufacturers), auto ancillary companies outperformed automobile companies, led by strong momentum in exports in the automobile sector.

Despite a subdued quarter, most companies gave a strong outlook going forward, with demand expected to improve from Q2FY2022. Moreover, rural sentiments are expected to remain strong because of strong kharif production in the previous years. Sharekhan is of the opinion that companies having a strong distribution network in rural and semi-urban areas will benefit. Both OEMs, as well as ancillary units, are well prepared to deal with the third wave or any new variant of COVID-19 by managing the inventory and operations optimally.

Outlook

The brokerage firm remains positive in the sector despite near-term challenges of Covid-19 related disruptions and chips shortage. The passenger vehicle (PV) segment, both for two-wheelers (2W) and four-wheelers (4W), is expected to remain strong amid Covid-19, as a preference for personal transport. Rural demand is expected to recover strongly in southern and western India, given the timely arrival of the monsoon season, higher reservoir levels, and higher kharif sowing last year.

“The strongest recovery in the CV segment in FY2022 and FY2023, driven by improved economic activities, low-interest rate regime, and better financing availability,” stated the report.

The supply-side constraint of semi-conductors and significant delay in recovery from COVID-19 infection or vaccination rollout are some of the near-term risks for the sector.

Sector picks

Among the 2W space, Sharekhan prefers Hero MotoCorp because of positive sentiments in rural and semi-urban areas.

In the passenger car space, it likes Maruti Suzuki and expects it to maintain its dominant market share and robust export growth.

M&M, given its leadership position in the tractor segment and its continued strong performance in other segments such as LCV (light commercial vehicles) and UVs (utility vehicles).

Within auto ancillary companies Sharekhan is bullish on Bosch, Sundaram Fasteners, Suprajit Engineering, Ramkrishna Forgings, Gabriel India, Greaves Cotton and Apollo Tyres.

(Disclaimer: The recommendations in this story are by the respective research and brokerage firm. Money9 & its management do not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)