Auto Q3 Preview | Commercial vehicles may hog limelight in subdued quarter for PVs, 2Ws, tractors

Chip shortages and weak rural consumer sentiment likely weighed on auto company earnings in the third quarter on a year-on-year basis. However, commercial vehicles may report good numbers as infrastructure activities increase. On a sequential basis, a recovery is expected, with companies reporting strong numbers.

Additionally, rising costs of inputs such as metals and oil are expected to have hit the operating performance of these companies. Generally, the impact of rising input costs takes place with some lag, but investors started pricing them in earlier.

The Nifty Auto index, which started declining in mid-November, later recovered on hopes that earlier concerns would ease and economic activities would improve.

Elara Capital expects its “auto universe” 3Q revenue (ex-Tata Motors) to remain little changed (up 7.3 percent QoQ), with gradual demand normalisation.

“Q3 production was hit by semiconductor shortage and weak consumer sentiment, particularly in rural regions,” said Elara Capital.

The brokerage expects EBITDA (earnings before interest, tax, depreciation and amortisation) for the Elara auto universe (ex-Tata Motors) to decelerate 25.9 percent YoY (up 8.4 percent QoQ).

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Kotak Institutional Equities expects auto original equipment manufacturers’ revenue to decline by 5 percent YoY due to the continued chip shortage impacting passenger vehicles, light commercial vehicles and premium motorcycle segments, and weak festive two-wheeler demand.

The brokerage said EBITDA may decline 43 percent YoY due to raw material headwinds.

“We expect gross margins to remain under pressure for almost all OEMs on a YoY basis due to a steep increase in the raw material basket, partly offset by price hikes taken during the quarter,” it said.

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To offset the impact of rising input costs, Tata Motors, Hero MotoCorp, Maruti Suzuki, Eicher Motors and Ashok Leyland increased prices during the quarter and this may support sequential numbers, experts said.

“Increase in commodity costs on a QoQ basis may largely be offset by price hikes and thus, EBITDA margin will depend on operating leverage and volumes in Q3FY22,” said Elara Capital.

Key input commodity costs have risen – aluminium (up 5.1 percent QoQ), copper (up 3.3 percent QoQ), natural rubber (up 2.6 percent QoQ) and lead (up 1 percent QoQ) – while steel costs declined 8.2 percent QoQ.

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“This has compelled the ancillaries to pass on the raw material cost inflation to the OEMs with a quarter lag, as per their agreement. The OEMs have hiked prices within around 1.5-3 percent range across-the-board, to partially cushion the impact on margins,” said Elara.

According to Prabhudas Lilladher, gross margins are expected to contract by 275 basis points YoY to 25.6 percent for OEMs (ex-Jaguar Land Rover). One basis point is one-hundredth of a percent.

“EBITDA margins may contract by around 300 bps YoY. Aggregate fixed cost to largely remain flat YoY led by cost rationalisation and operating leverage,” it said.

On volumes, growth in domestic commercial vehicles was about 3 percent, but passenger vehicles, two-wheelers, and tractors registered a decline of about 16 percent, 24 percent and 15 percent YoY, respectively.

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Sector-wise expected performance

Commercial Vehicles

Emkay Global expects revenue growth of 20-35 percent for Tata Motors, Eicher Motors and Ashok Leyland.

“We expect robust double-digit revenue growth in CVs for the next two years, supported by improving macros, government thrust on infra spending and recovery in replacement demand,” it said. “The CV segment has outperformed, led by a sequential recovery in fleet movement and improved demand from construction and mining activities.”

Passenger Vehicles

“Enquiries and bookings have been encouraging, however, semiconductor shortage has led to high waiting periods. With Malaysian chip supply now normalising, PV OEMs are realigning their production schedules to meet demand,” said Prabhudas Lilladher.

Domestic passenger vehicle volumes declined by about 16 percent YoY owing to chip shortages despite a large order book.

“We expect revenue growth of 1 percent for Maruti Suzuki, 21 percent for M&M auto division (total revenue growth of 12 percent for M&M) and 67 percent for Tata Motors-PV. Led by the pending order book and improving chip supplies, we expect revenues to grow strongly over the next two years,” said Emkay Global.

Two-Wheelers

Domestic two-wheeler volumes declined by about 24 percent YoY owing to moderation in sentiment and a high base last year. In comparison, exports grew about 1 percent YoY despite the high base, driven by stable demand and steady forex rates in key markets.

“We expect 11 percent revenue growth for Eicher Motors-RE, 2 percent for Bajaj Auto and 1 percent for TVS Motor, while we see a 21 percent fall for Hero MotoCorp. The momentum in exports is expected to be sustained. In comparison, domestic demand may be impacted in the near term by the increase in Covid cases. We expect volume growth to turn positive from Q1FY23,” said Emkay Global.

Prabhudas Lilladher said two-wheeler retail sales may improve as rural incomes recover after the rabi (winter) crop harvest.

Tractors

Domestic tractor volumes fell 15 percent YoY. In terms of revenue, “we expect a 7 percent drop for Escorts and 2 percent for M&M farm division. Led by a high base and lower government subsidy support, we expect volumes to remain under pressure in the near term,” said Emkay Global.

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