Auto Q1 preview: Tractor, two-wheeler companies may buck the slowdown trend

‘Forgetful’ is the word that analysts have unanimously chosen for the April-June, 2020 quarter for the automobile industry while writing the result preview notes. For the period marked by partial ‘unlocking’ of the economy, analysts on average, see decline in revenues up to 70 per cent year-on-year (YoY), while slump in sales volume could be as much as 80 per cent.


Auto and auto-ancillaries, barring tractor and two-wheeler players, lost more than half of the quarter’s sales due to Covid-19 lockdown. Gradual ramp-up in production due to supply chain challenges post unlocking further added to the lost sales, they say.


Analysts at Sharekhan foresee automotive original equipment manufacturers (OEM’s) bearing larger impact in Q1FY21 and expect the revenues to decline about 70 per cent YoY for the firms under its coverage, which includes Maruti Suzuki, Bajaj Auto, TVS Motor Company, M&M, and Ashok Leyland. “Auto ancillary companies, with revenues from the replacement segment (which saw faster pick up in May and June 2020), would witness lesser impact with revenues declining 55 per cent YoY” they said in their results preview report.


For Raghunandhan N L and Mumuksh Mandlesha, research analysts at Emkay Global Financial Services, aggregate revenue could slip 59 per cent YoY owing to lockdown and inventory correction with most dealers. They foresee steep fall in revenue for Ashok Leyland (-87 per cent), Maruti Suzuki (-78 per cent), Bharat Forge (-70 per cent) and TVS Motor Company (-66 per cent).


“However, relatively lesser fall is expected for tractor OEMs as well as ancillaries with exposure to domestic replacement demand, such as Escorts (-24 per cent), M&M (-54 per cent), Apollo Tyres (-50 per cent) and Amara Raja Batteries (56%),” they wrote in an earnings preview note.


Volumes hit


Anish Rankawat and Ronak Mehta, analysts tracking the sector for Nirmal Bang Institutional Equities, expect Maruti Suzuki to post a loss for the quarter under review, led by 80 per cent sequential decline in volume and negative operating leverage. M&M, on the other hand, is seen taking a 37 per cent quarter-on-quarter (QoQ) hit in volumes despite being supported by healthy tractor sales in June, which was the second highest June sales ever.


Commercial vehicle maker Ashok Leyland, however, is likely to post a loss of Rs 330 crore on nearly 85 per cent QoQ volume decline, they said.


As for two-wheelers, Ranksawat and Mehta, peg Hero MotoCorp’s sales volume to tank 69.4 per cent YoY and 58 per cent QoQ to 563,426 units. As regards Bajaj Auto and TVS Motor Company, their volumes could be lower by 64.5 per cent YoY (55.3 per cent QoQ) and 71.1 per cent YoY (57.8 per cent), respectively.


Two-wheelers to buck the trend?


Motilal Oswal Financial Services (MOFSL) expects the companies under its coverage to report an aggregate loss before tax/loss after tax at Rs 14,000 crore/Rs 11,800 crore for the recently concluded quarter. Excluding Tata Motors, the brokerage still expects the companies to post a loss of Rs 1,970 crore.


“The tractor segment was the least impacted indicating lower stress on the rural side. EBITDA for MOSL Auto Universe is expected to be negative for the first time due to operating deleverage,” it said in a results preview report.


“We expect OEM’s like Ashok Leyland (-90 per cent), Maruti Suzuki (-81 per cent), TVS Motor/Eicher Motors/ Hero MotCorp (-67 per cent) to clock decline in revenue on YoY basis and report loss for Q1FY20 due to lower volumes, lower operating leverage and higher fixed cost. Among OEM’s we expect Bajaj Auto’s revenue to decline 63 per cent YoY but report profit of Rs 437 crore due to export volumes,” noted analysts at IDBI Capital.


Meanwhile, analysts at Emkay Global opine that despite softening input commodity prices and cost reduction efforts, aggregate EBITDA margin is expected to contract by 10 per cent YoY due to lower scale.


“On currency movement, rupee depreciation is negative for Maruti Suzuki and Hero MotoCorp, while positive for Bajaj Auto, TVS Motor, Apollo Tyres, Motherson Sumi Systems and Tata Motors. Led by a steep margin decline, most companies are likely to post losses, while companies with relatively lower revenue fall or lower fixed costs are expected to post a profit including Escorts, Baja Auto, Hero MotoCorp, M&M and Amara Raja Batteries,” the brokerage noted.


That apart, Edelweiss Securities expect gross margins to remain favourable owing to retention of commodity costs benefits and pass-through of BSVI costs; sharp cut in variable costs such as advertising, travel expenses, etc; easing in fixed costs; and rationalisation of staff costs (by withholding incentives/ increments, and not necessarily via lay-offs). Moreover, sharp negative operating leverage would weigh on EBITDA margins, the brokerage said.


Key Monitorables


Analysts would watch for resumption in financing activity, commentary on whether vehicle sales are suffering downtrading or is premumisation sustaining, details on whether there is shift towards personal mobility, status of supply side challenges, and views on OEMs maintaining pricing sanity even if the slowdown persists.