Strong growth, but margins a mixed bag

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Updated: January 22, 2018 3:30:35 AM

Bajaj Auto, Ashok Leyland likely to post robust earnings; Eicher’s consensus FY18 estimates could see downgrades

Ashok Leyland, Hero MotoCorp, Bajaj Auto, Eicher Motors, Maruti Suzuki, Mahindra & Mahindra, Ashok Leyland, tata motorsStrong volume growth but weaker margin: Hero has reported 16% y-o-y volume growth in Q3 helped by last year’s low base.

Reported y-o-y volume growth has, by and large, been strong across auto OEMs in Q3FY18 helped by the low base of demonetisation in November & December, 2016. However, we expect margins to be more of a mixed bag due to adverse commodity price impact (y-o-y) and seasonality (q-o-q). We expect particularly strong earnings from Bajaj and Ashok Leyland and an improvement for Tata Motors. Eicher’s consensus FY18 estimates could see downgrades post-earnings.

Hero MotoCorp
Strong volume growth but weaker margin: Hero has reported 16% y-o-y volume growth in Q3 helped by last year’s low base. However, we expect margins to be weaker due to higher commodity prices, not fully offset by price increases.

Bajaj Auto

3-W, exports drive strong quarter: Strong volume growth in 3-W and exports should drive strong revenue growth and margins for Bajaj in Q3. We expect upgrades to consensus estimates post-earnings. However, underperformance in domestic motorcycles continued in Q3 and remains a structural concern for the company, in our view.

Eicher Motors

Growth decelerates further: Eicher’s volume growth continues to decelerate, declining to 18% y-o-y domestically in Q3. We expect volume growth to settle at 15%, FY19 onwards. Margin is likely to remain range-bound, as has been the case over the last few quarters. Consensus full year FY18e estimates could see downgrades post-earnings for the first time in many years.

TVS Motor

Strong volume growth but margins could disappoint: TVS continued its trend of strong volume growth across motorcycles and scooters, though mopeds offset some of the gains. Management has guided for double digit Ebitda margin by Q4FY18 but expect decline in margin q-o-q as some of the gains of strong inventory addition in Q2 reverses in Q3.

Maruti Suzuki

Moderate revenue growth, weaker margins: Constrained by production capacity and relatively lower mix change benefit, we expect 12% y-o-y revenue growth for Maruti in Q3. Margins are also likely to be weaker both y-o-y and q-o-q due to a combination of ramp-up of the Gujarat plant and higher commodity prices not fully offset by price increases and seasonality.

Mahindra & Mahindra

Weaker tractor volume growth could limit margin gains: For M&M tractor sales was up only 6% y-o-y in Q3 despite strength in November and December. As a result, we expect margins which were extremely strong in Q2 to come off to some extent though still improve on a y-o-y basis helped by better performance in the automotive segment off a low base.

Ashok Leyland

Strong quarter helped by 50% revenue growth: We estimate Ashok Leyland’s revenue to grow 50% y-o-y helped by extremely strong M&HCV volume growth and favourable mix change. This should also support margin, in our view, despite higher discounting and adverse commodity price movement.

Tata Motors

Expect profit in standalone, lower hedge losses in JLR: We expect Tata Motors standalone to turn profitable in Q3 after several quarters of losses helped by strong volume growth across all key segments. In JLR, we expect lower hedge losses in the quarter to help reported earnings, despite relatively weak retail volume growth.

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