Will price hikes save the day for auto companies in Q4?
Premium- In comparison to consensus for original equipment manufacturers, Nomura expects beat for Maruti, M&M and Ashok Leyland but a miss for Tata Motors (JLR)
The recovery in demand across different automobile segments has not been uniform in the March quarter (Q4FY22). While the commercial vehicle (CV) segment is seeing a strong rebound in demand, the same cannot be said for two-wheelers (2Ws) and tractors. However, the sequential improvement in 2W and tractor volumes is encouraging.
In the passenger vehicle (PV) segment, easing semiconductor shortage is supporting the gradual improvement in demand. But rising fuel prices is a point of concern, particularly in the 2W and entry-level PV segment as it impacts affordability.
Besides, higher raw material costs pose a risk to Ebitda (earnings before interest, tax, depreciation and amortization) margins of automakers. As such, the companies have resorted to price hikes in Q4 which have shielded them from deterioration in financial metrics to an extent. “Our commodity cost index shows PVs up ~250bp (basis points) and 2Ws up 350bp from Q3FY22 levels. Our analysis of commodity contracts and inventory suggests the impact is not likely to be meaningful in Q4FY22F and may only be visible in 1QFY23F," said analysts at Nomura Financial Advisory and Securities (India) Pvt. Ltd in a report on 11 April. One basis point is one-hundredth of a point.
According to analysts at Centrum Broking Ltd, the Q4FY22 revenue of Bajaj Auto Ltd and Hero MotoCorp Ltd is expected to decline by 12% and 11% year-on-year (y-o-y) respectively. TVS Motor Co. Ltd revenue is foreseen to rise by 6% y-o-y as TVS volumes were down only by 8% y-o-y as against Bajaj Auto and Hero MotoCorp Q4 volume decline of 17% and 24% y-o-y respectively. Ebitda margins for TVS Motor is estimated to rise narrowly but Bajaj Auto and Hero MotoCorp are expected to report decline in margins by 330bps and 100bps y-o-y respectively.
In PVs, the demand in the premium segment such as SUVs has remained intact. Maruti Suzuki India Ltd and Tata Motors Ltd PV revenues are expected to grow by 16% and 57% y-o-y respectively, according to analysts at Nomura. Tata Motors CV business is expected to see 11% y-o-y growth in revenue.
Mahindra and Mahindra Ltd (M&M) and Ashok Leyland Ltd are expected to report 25% y-o-y revenue growth each in Q4, as per Nomura estimates. On the Ebitda margin front, M&M is anticipated to report y-o-y decline of 264bps while Ashok Leyland’s margin is anticipated to remain flattish y-o-y. The tractor segment in M&M is partly impacting the margins.
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“Overall, in comparison to consensus for original equipment manufacturers, we expect beat for Maruti, M&M and Ashok Leyland but a miss for Tata Motors (JLR)" added the Nomura report.
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