Supply constraints, cost pressure likely to dent earnings, Auto News, ET Auto

New Delhi: Auto companies are expected to report muted growth in the second quarter ended September 30, 2021 owing to the production constraints stemming from semiconductor shortage and higher commodity prices. Also, this Q2 did not have the benefit of pent-up demand unlike the base quarter when such demand after the Covid-19 first wave led to steep volume jump in sales.

Kotak Institutional Equities (KIE) sees revenues for the auto companies, under its coverage, increasing by 7% year-on-year (YoY) in Q2 FY22 while earnings before interest, tax, depreciation, and amortization (EBITDA) contracting by 18% YoY due to raw material headwinds. “We expect sequential decline in gross margins due to sharp increase in raw material basket, especially steel, rubber and precious metals,” KEI said in a note.

Source: Bloomberg, Kotak Institutional Equities

Suppliers will have a muted quarter with 6% YoY increase in revenues and 14% YoY decline in EBITDA during the quarter under review, it added.

For tyre companies, analysts at KEI foresee revenue growth of 10%-20% on a YoY basis led by strong growth in OEM and replacement segments. “However, gross margins will decline sharply due to sharp increase in natural rubber prices,” they added in their results preview report. Most domestic brokerage firms pointed out that despite elevated utilisation levels and lower discounts due to encouraging demand trends, inflated commodity prices will weigh on margins.

We expect sequential decline in gross margins due to sharp increase in raw material basket, especially steel, rubber and precious metalsKotak Institutional Equities

Segment-wise forecast

Passenger Vehicle (PV): Domestic PV industry volumes rose marginally by about 2% YoY, as growth was limited by the semiconductor crisis. PV bellwether Maruti Suzuki recorded a 3.5% decline to 3.79 lakh units while Tata Motors’ standalone volumes jumped 55.2% to 1.71 lakh units.

Analysts at Nirmal Bang see Maruti’s earnings to be relatively weak due to sluggish volumes and pressure on profitability. “Overall, we expect EBITDA margin to improve by 110bps QoQ on account of positive operating leverage, price hikes, lower discounts and cost controls, which should be partially offset by higher raw material costs,” they added.

Those at ICICI Direct meanwhile expect the company’s EBITDA margins to be at 5% and profit after tax (PAT) for the quarter at INR 708 crore.

Two-wheelers: Among two-wheelers, market leader Hero MotoCorp’s volume crashed 20.4% to 14.39 lakh units. Bajaj Auto rode on healthy domestic performance to post the 8.6% total YoY volume increase to 11.44 lakh units while Royal Enfield volumes at Eicher Motors dipped to 1.23 lakh units.

In this segment, KIE expects Bajaj Auto and Hero MotoCorp’s EBITDA margin to decline by 230-275 bps YoY on account of input cost headwinds. “We expect Bajaj Auto operating performance to fare better than Hero Moto Corp given its higher exposure to the export segment,” analysts added. For two-wheelers, narration on demand revival during the festive period and electrification transition efforts would be a key monitorable.

Commercial vehicles (CV): Domestic CV industry volumes grew strongly by 24% YoY, almost reaching 2020 levels on a low base. Research analysts at Emkay reckon robust revenue growth of 55%-95% for OEMs like Tata Motors-standalone, VECV and Ashok Leyland. “We expect strong growth in H2 as well on the back of improving freight availability and higher infrastructure spending,” they added.

Quarterly volume of OEMs

Outlook

Going ahead, key factors to watch out for during management commentary would be counter measures taken by the companies to offset input price inflation, growth outlook in India for the industry and respective companies. On the commodity front, prices of steel and aluminum have increased; however, copper and precious metal prices have declined last quarter which should ease off raw material pressures in the coming quarters, brokerages anticipate.

“We retain a positive view on the auto sector, underpinned by expectations of a cyclical upturn,” Emkay analysts said. Among key risks, they mentioned, delay in economic recovery, further increase in commodity prices and adverse currency movements.

Tata Motors expects the Punch to be the top selling model in its portfolio and help the brand move towards a monthly volume of 30,000-35,000 units — assisting it move closer to posting a pretax profit in the passenger vehicle business, said people in the know. The business had posted a loss of Rs 1,558 crore before interest and tax in the fiscal year ended March 31, 2021.

Booming demand for consumer electronics and supply chain disruptions across the globe have led to an acute shortage of chips, forcing a number of car companies to drastically cut production as they try to secure limited semiconductor supplies.