Auto makers are expected to report good numbers in the third quarter of the ongoing fiscal, led by healthy volume growth, which has been aidedby the low base of demonetisation, say analysts. According to estimates of analysts collated by Bloomberg, most major auto makers are expected to report double digit growth in revenues and profits. “Retail volume growth was healthy across the automotive segments in 3QFY18. This was largely led by a recovery in rural demand as well as strong sales in the recently concluded festive and marriage seasons,” says a report by Motilal Oswal, that lists these factors apart from the low base due to the note ban. However, rising commodity prices may weigh on the margins, since most manufacturers did not pass them on to buyers. However, analysts add that operating leverage benefits and price hikes taken by some OEMs will help partly offset the commodity price inflation. Analysts at Jefferies said, “We expect margins to be more of a mixed bag due to adverse commodity price impact (y-o-y) and seasonality (q-o-q).” Meanwhile, analysts at Nomura opined, “EBITDA margins are likely to improve 110 bps y-o-y (down 80 bps q-o-q) on price hikes and operating leverage.”
Due to high level of discounting, especially on commercial vehicles, analysts fear that net realisations may fall in the quarter. Analysts at Motilal Oswal said, “According to our channel checks, the CV industry witnessed a sequential increase in discounts, as OEMs pushed inventory in a bid to gain market share. We note that discount per unit increased by 3-5% in Cvs.” Most analysts are especially bullish on two stocks: Ashok Leyland and Bajaj Auto. According to Bloomberg estimates, Ashok Leyland’s revenue may grow by 57% and its net profit by 114%, while Bajaj Auto’s revenue could grow 23% and net profit by 5%. According to brokerages, Bajaj Auto’s revenues would rise despite its weak performance in the domestic market, as its exports and three-wheeler sales grew sharply. According to Kotak Institutional Equities, “Volumes increased by 17.6% y-o-y, led by 78% yoy growth in three-wheeler segment and 22% y-o-y growth in two-wheeler export volumes, offset by 38% y-o-y decline in domestic motorcycle volumes. We expect revenues to increase by 23% y-o-y due to a better mix and price increases post implementation of BS-IV norms.”
