Auto industry quarterly preview: Margins to be under pressure, commentary on festive season will be key

Volume growth has been divergent across segments and OEMs in Q2FY19e with Ashok Leyland, Bajaj and TVS expected to deliver 20%+ revenue growth and single-digit growth for others, partly on account of a delayed festive season. We expect Ebitda margin to be down y-o-y across the board putting further pressure on profits, with Ashok Leyland likely the only exception. Commentary on festive season demand (Oct/Nov) and margin outlook for H2 will be key to look out for.

Hero (Hold): After four quarters of double-digit volume growth, Q2 has been relatively weak for Hero with growth decelerating to 5% partly on account of a delayed festive season. We expect Ebitda margin to be down 200bps y-o-y.

Eicher (Buy): Q2 will be a first for Eicher as volume growth has decelerated to single-digits for the first time in many years. We expect weaker operating leverage and raw material cost pressures to have some adverse impact on margins as well.

TVS (Buy): We expect TVS to report 20%+ revenue growth but despite resultant operating leverage benefits, Ebitda margin is likely to be down 50bps y-o-y.

Bajaj Auto (Hold): Bajaj Auto has reported 25% volume growth in Q2 but as in Q1, margin will be key given its aggressive pricing strategy. We expect Ebitda margin to be up marginally q-o-q.

Maruti Suzuki (Buy): We expect Ebitda to be down 14% y-o-y due to weak volume growth (-1% y-o-y) and sharp margin contraction (270bps). A combination of factors will weigh on margin.

M&M (Buy): Volume growth has been weak for M&M in Q2 with tractors down 4%, PVs down 7% and CVs up 24%. We expect margin to be weaker y-o-y and q-o-q.

Ashok Leyland (Hold): Ashok Leyland has delivered the biggest positive surprise on growth in Q2 especially in the context of uncertainty related to the new axle norms. We expect 27% volume growth to lead to a similar revenue growth, 40% Ebitda growth and 50% net profit growth y-o-y.

Tata Motors (Buy): Turnaround of Tata Motors’ standalone business remains on track with Q2 Ebitda expected to be up sharply y-o-y and positive net profit vs losses last year. However, fundamentals for JLR have deteriorated materially and will lead to a sharp decline in consolidated Ebitda.