Q3FY20 earnings preview: Dismal volume performance to dent topline of auto sector

The CV segment has been getting impacted due to the higher axle load norm, which led to additional system capacity and a temporary halt on construction projects since the last 6-8 months, it added.

The brokerage expects the companies with higher exposure to overseas markets to report dismal performance on the back of a slowdown in global auto sales.

"Moreover, intense competitive environment and demand weakness led to higher incentives or discounts for two-wheelers and medium and heavy commercial vehicles (M&HCV), putting pressure on the companies’ margin," Reliance Securities said in a report.

In Q3FY20, the revenue of auto companies are expected to witness 2 percent YoY decline. However, it may rise 15 percent on a quarter on quarter basis. Lower raw material costs would compensate for negative operating leverage and higher discounts or incentives.

Further, Reliance Securities expects a net profit of auto companies to decline 3 percent YoY and remain flat QoQ primarily due to better performance of Bajaj Auto and Maruti Suzuki India Ltd.

"On YoY basis, we expect net profit of the auto original equipment manufacturers (OEMs) under coverage to grow by 10 percent YoY and 33 percent QoQ, while the ancillary companies are expected to witness 30 percent YoY decline in profit after tax (PAT) due to higher depreciation of tyre companies despite margin expansion,” the brokerage said.

Among automakers, Bajaj Auto Ltd is likely to report YoY growth in PAT due to higher exports, favourable exchange rate and lower tax rate, while Maruti Suzuki would also report growth due to better operating leverage and product-mix.

Tata Motors’ PAT growth is expected to be the highest due to Jaguar Land Rover’s (JLR) stellar performance, according to Reliance Securities.

On the other hand, Escorts and Hero MotoCorp are expected to report lower decline in PAT (less than 5 percent YoY), while Mahindra & Mahindra (M&M), Ashok Leyland, RK Forgings, Apollo Tyres and TVS Motor to deliver highly subdued performance with significant YoY drop in net profit of 20 to 90 percent.

The brokerage does not see any major pre-buying ahead of BS-VI implementation. It expects the volume of various automobile segments to decline in the range of 5 percent to 25 percent in FY20 and said that the industry will continue to witness a cyclical downturn in H1FY21.

Reliance Securities expects recovery by mid-FY21, post it stabilises from BS-VI transition and pricing.

The brokerage maintains a cautious view on the sector and believes that the passenger vehicle segment would outperform the industry due to low penetration, reducing product life-cycle, lower price hike due to BS-VI transition and faster up-gradation.

It prefers tractor segment, as it is best-placed among all having no bearing of any emission-led transition and any inventory pressure.