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Auto sector Q2 preview: Volumes recover supported by wholesales ramp-up; margin expansion likely

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Auto sector Q2 preview: Volumes recover supported by wholesales ramp-up; margin expansion likely

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The automobile sector witnessed a stronger than expected volume recovery in the second quarter of fiscal 2021 driven by better demand, improvement in the supply chain and inventory buildup ahead of the festive season. The incremental easing of the lockdowns since the start of the quarter led to the release of the pent-up demand across customer-led segments of passenger vehicles (PV) and two-wheelers.

Auto sector Q2 preview: Volumes recover supported by wholesales ramp-up; margin expansion likely
The automobile sector witnessed a stronger than expected volume recovery in the second quarter of fiscal 2021 driven by better demand, improvement in the supply chain and inventory buildup ahead of the festive season.
The incremental easing of the lockdowns since the start of the quarter led to the release of the pent-up demand across customer-led segments of passenger vehicles (PV) and two-wheelers.
During the quarter, OEMs launched newer variants and models and replenished inventory levels to capture any demand spurt during the festive season, even as tighter credit clearance norms may continue to hinder demand.
While volumes for Tractors are growing on a YoY basis, two-wheelers and PV volumes are at 90– 110 percent of last year’s levels. LCV has also recovered to 70–80 percent of last year’s levels, whereas M&HCV stands 40–50 percent lower, YoY.
On the operational front, after eight straight quarters of YoY decline in EBITDA margins, Q2FY21 could potentially mark the beginning of the margin recovery phase, brokerage Motilal Oswal said.
“EBITDA margins for our OEM (ex-JLR) universe are likely to expand 60 bp YoY to 10.9% (v/s 4% in 1Q), led by good margin recovery in mainstream 2W, Tractors, and Maruti Suzuki. On the other hand, we expect margins to decline for CV players, Eicher Motors, and TVS Motor Company,” the brokerage said.
According to ICICI Securities, weaker product mix and higher commodity prices may keep operating leverage benefits in check. It expects component companies with higher replacement revenue mix to perform relatively better than peers.
Overall, the automobile companies are expected to see around 10 percent YoY increase in realisations on account of BS-VI price hikes, impacted by INR appreciation while the operating performance to be largely flat. Gross margins can increase 46 bps YoY and employee costs may remain marginally lower (down 17 bps YoY). EBITDA is likely improve around 4.4 percent YoY maintaining an EBITDA margin of 17.5 percent (up 95 bps), as per ICICI Securities.
Among two-wheelers, Hero MotoCorp is expected to see revenue growth of around 27 percent YoY largely due to volume growth of 7 percent YoY and net realisation improvement of 18 percent due to pass-through of the BS-VI price increase, according to the brokerage.
Gross margins are likely to fall by 313 bps to 29 percent due to higher raw material costs. EBITDA margin is expected to decline by 85 bps YoY.
Bajaj Auto saw a volume decline of around 10 percent YoY, even as domestic 2W segment grew 6 percent YoY, while domestic 3-Wheeler slumped 78 percent, YoY.
Realisations are expected to rise 10 percent on account of BS-VI price hikes, impacted by INR appreciation. Operating performance is likely to be largely flat. Gross margins can increase 46 bps YoY and employee costs may remain marginally lower. EBITDA may improve by 4.4 percent YoY maintaining an EBITDA margin of 17.5 percent, up 95 bps. The brokerage expects PAT to drop by 14 percent YoY.
TVS Motor Company’s volumes declined marginally by 2 percent YoY while realisations are expected to be up 4 percent on better product mix and increased BS-VI model prices.
Analysts expect revenue improvement of 2.2 percent even as gross margins may decline 123 bps to 25.4%. EBITDA margin is expected to be flat at 8.9 percent, up 16 bps, while TVS is likely to report PAT of Rs 180 crore, ICICI Securities said.
In Q2FY21, volumes of Royal Enfield declined 9.6 percent impacted by discretionary demand weakness across markets. Realisations are expected to improve 9 percent due to the rising contribution of 650cc twins, BS-VI price increases. Revenue is expected to be down slightly by 1.5 percent as gross margins came in at 45 percnet, down 77 bps.
“We expect EBITDA margin to decline 116 bps YoY to 23.9% as employee costs may remain sticky (up 26bps). PAT is expected to decline ~26% YoY due to higher tax rate (23%),” ICICI Securities said.
Among four wheelers, Maruti Suzuki may report strong growth in revenues at 17 percent YoY due to domestic PV volumes growth of 19 percent and exports decline of 13 percent. Realisations may hold steady amid stable product mix of UV share.
Gross margin may improve by 135 bps and EBITDA growth by 35 percent at Rs 2,170 crore, up 146 bps YoY, as employee expense mellows down to 4.2 percent of sales, down 71 bps.
For Tata Motors, JLR wholesale volumes declined 40 percent YoY. Topline is expected to decline by 14 percent with EBITDA margin down 271 bps to 8.1 percent.
“We expect JLR to post revenues of ~GBP 4.3 billion (down 29% YoY) with adjusted EBITDA margin of 9% (down 475 bps YoY). On operational basis, we expect JLR to report a loss of GBP 130 million. Standalone business is expected to witness a topline decline of 4.4% YoY as PV business is witnessing strong growth and is likely to post EBITDA margin improvement of 197bps YoY to -0.4%,” ICICI Securities said.
Mahindra & Mahindra’s (M&M) overall automotive volumes declined around 23 percent YoY, while tractor segment grew 30 percent. Expect margin expansion of 127 bps to 15.4 percent due to higher share of tractor segment and strong pick-up in UV sales aided by lower other expenses and employee costs. M&M is expected to report PAT decline of 7 percent.
Ashok Leyland’s M&HCV volumes dropped 53 percent, while LCVs grew 17 percent YoY, thus, leading to revenue decline of 27 percent YoY, up 341 percent QoQ.
Margins are expected to decline 133 bps due to employee costs remaining sticky and higher other expenses.
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