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Are we heading for more pain in auto stocks? Q1 earnings projections bleak

Nomura expects June quarter be the weakest one in recent times for the auto sector.

Updated: Jul 11, 2019, 01.33 PM IST
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Motilal Oswal said all auto segments continued to face demand headwinds in June quarter, continuing the trend since the previous quarter.
Mumbai: It is going to be yet another weak quarter for Indian auto companies when they unveil their June quarter report cards, as weak demand, high base, negative operating leverage, liquidity woes and higher discounts continue to weigh on the sector.

Auto stocks have been beaten down badly over the past one year. Maruti Suzuki is down some 38 per cent year to date to trade at Rs 5,952 on Thursday, while Eicher Motors has slipped 33.6 per cent to Rs 18,859, M&M 33 per cent to Rs 627 and Tata Motors 45 per cent to Rs 151. Among two-wheeler makers, Hero MotoCorp has declined 33 per cent year to date to Rs 2,451 while Bajaj Auto is down 11.2 per cent at Rs 2,676.

While revenues may decline in single-digit percentage points, profits may fall drastically for some. Nomura expects June quarter be the weakest one in recent times for the auto sector.

For its coverage universe, excluding JLR, Nomura forecasts around 5 per cent year-on-year drop in revenue growth while earnings before interest, tax, depreciation and amortization (Ebitda) and profit after tax (PAT) are likely to fall around 23 per cent and 34 per cent year on year (YoY) respectively.

Nomura expects India’s economic growth to disappoint in fiscal year 2020 at 6.5 per cent compared with 7 per cent projected by the government.

“Given this outlook, we expect further risk to our volume estimates,” Nomura analysts said, pointing out that demand indicators like freight rates are depressed and delayed monsoon rainfall can also put rural demand at risk. Demand may start to look up again in the second half of the financial year, they said.

“Recent actions by the government and the RBI to improve liquidity for NBFCs should support demand. With a lower base, we expect volume growth to improve from Q1 of FY20F levels and possibly turn positive in H2 of FY20F,” Nomura analysts said.

Motilal Oswal said all auto segments continued to face demand headwinds in June quarter, continuing the trend since the previous quarter. Retail demand further deteriorated due to liquidity issues, weak consumer sentiment and slowdown amidst the general elections.

Consequently, inventories are at record levels across segments and highest at 60-70 days for in the two-wheeler segment despite production cuts.

The brokerage has lowered EPS estimates for FY20 and FY21 for all auto companies under its coverage, with the highest FY20 EPS cut happening for Ashok Leyland at 18 per cent, Maruti Suzuki India at 13.5 per cent and Mahindra & Mahindra at 12 per cent.

Motilal Oswal expects adjusted PAT for Maruti Suzuki to decline by 31 per cent YoY, and that of M&M to fall by 20 per cent YoY.

It sees Tata Motors’ consolidated revenues to decline 15 per cent YoY resulting in a net loss of around Rs 1,180 crore.

Reliance Securities expects auto companies under its coverage universe to report a 7.5 per cent year-on-year (YoY) decline in revenue in June quarter.

It expects profit after tax (PAT) of its auto universe, excluding Tata Motors, to decline by 25 per cent YoY, where the quantum of decline would vary from 2 per cent to 48 per cent. It expects PAT to decline 20 per cent sequentially.

Including Tata Motors, the PAT of its coverage universe is expected to fall by 30 per cent YoY and 55 per cent quarter on quarter (QoQ).

“Considering higher input cost, negative operating leverage and higher expenses due to discounts/ incentives, we expect the margin to contract on YoY as well as QoQ basis,” the brokerage said.

According to Nomura, Ebitda margins are likely to come off by around 250 basis points YoY mainly on lower operating leverage.

In a July 9 note, ICICI Securities said it would be another forgettable quarter for the auto sector. “The demand slump was witnessed in all segments across premium urban to mass market rural,” the ICICI Securities analyst said.

In the near term, ICICI Securities is worried about weakening consumer sentiment amidst a rise in competitive intensity via new product launches is likely to push customer acquisition costs further upwards, while rising dealer delinquencies is leading to constrained financing and, thus, current cycle could remain protracted.

He expressed concerns over renewed electrification push from policy makers, as industry grapples with existing new technology costs.

“Thus, FY20 could be a trickier year amidst weak consumer sentiment coupled with the BS-VI production planning conundrum. Even a modest inventory glut post next festive season could trigger another fire sale in Q3FY20,” the ICICI Securities analyst said in the note.
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