According to Jefferies, for Q1FY20, volumes have been flat to sharply declining across all OEMs with a 20% decline for Tata Motors (standalone), Royal Enfield and Maruti, 12-14% decline across Hero, Ashok Leyland (MHCV) and M&M tractors, and flattish for Bajaj and TVS.
By R Ravichanran
Automotive OEMs are expected to take a huge hit in their margins as well as revenue growth owing to subdued volumes, increase in discount levels, higher commodity prices and intense competitive environment across the sector, analysts tracking the industry have said.
Though there was a moderate price hike of 0.5-1% across products, higher discounting (owing to weak demand) and a slowdown in the global auto market will cast a shadow on the Q1 performance of the companies, they added. “We expect a weak quarter for auto companies. Revenue/Ebitda/net profit for the major companies are likely to decline by 8%/24%/50% year-on-year. Ebitda margin will likely decline by 210 bps y-o-y due to increase in discount levels and negative operating leverage,” Kotak Institutional Equities noted.
“Suppliers will have a relatively better quarter with 6% revenue growth y-o-y due to exposure to after-market and exports while Ebitda will likely decline by 3% y-o-y.” Passenger vehicle and CV OEMs will particularly report weak results while net profit of battery companies will likely grow by 10-28% y-o-y, it added.
“Though the declining prices of major commodities such as steel, aluminum and lead over the past two quarters would be marginally positive for gross margin of companies in this quarter, this will be more than offset by increased discount levels due to softness in demand and negative operating leverage,” the analysts said.
According to Jefferies, for Q1FY20, volumes have been flat to sharply declining across all OEMs with a 20% decline for Tata Motors (standalone), Royal Enfield and Maruti, 12-14% decline across Hero, Ashok Leyland (MHCV) and M&M tractors, and flattish for Bajaj and TVS. Likely y-o-y margin contraction due to weak economies of scale and pricing pressures should lead to greater falls in earnings across the firms.
“MHCV sales declined sharply at 23% y-o-y with both Ashok Leyland and Tata Motors being impacted. LCVs remained the relative outperformer but even here sales were down 8% in June and 5% in Q1FY20. Similarly, tractor down-cycle continued with a 17% decline in June and 15% in Q1FY20. We note that, so far, the progress of monsoon has also been weak/delayed with 32% deficit across India in June,” analysts at Jefferies pointed out.
Another market analyst Reliance Securities said: “We expect auto companies under our coverage universe to witness a 7.5% y-o-y decline in revenue. Considering higher input costs, negative operating leverage and higher expenses due to discounts/incentives, we expect the margin to contract on y-o-y as well as q-o-q basis.”
Meanwhile, Motilal Oswal, in its analysis, said: “Ebitda margin for our OEM (ex-JLR) universe is likely to contract for the fourth consecutive quarter by 310 bps y-o-y (-70 bps q-o-q) to 10.7% due to higher variable marketing expenses and operating deleveraging. While almost all OEMs are likely to witness y-o-y margin contraction, MM and TVSL are expected to deliver a sequential margin recovery of 80 bps and 20 bps, respectively.”