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Auto Q4FY22E Preview: 2-W plays spoilsport, operating leverage to allay raw material pain

ICICI Securities 11 Apr 2022

What's Buzzing:

Auto sector companies will soon announce their Q4FY22results. The results are expected to be a mixed bag with only a handful of names expected to report a healthy performance. We expect our coverage universe to report 7.2% QoQ topline growth & ~100 bps QoQ decline in EBITDA margins to 11.0%. Ensuing PAT growth is expected at 3.6% QoQ. Outperformance is expected to be led by the OEM pack vs. ancillary coverage.

Context:

In the auto space, total industry volumes in Q4FY22 are expected to decline ~3.6% QoQ with 2-W space witnessing a volume decline of ~8% QoQ. Rest all categories (except tractors) witnessed healthy double digit sequential growth with CV space outperforming the pack with 20%+ QoQ growth. In the PV domain, Maruti Suzuki recorded 13.5% QoQ growth in volumes to 4.9 lakh units while Tata Motors’ (TML) standalone volumes (PV+CV) jumped 22% to ~2.4 lakh units. M&M’s automotive volumes were up 28.7% QoQ with tractors volumes at 0.73 lakh units, down 21.6% QoQ. Volumes at Ashok Leyland were up 43% QoQ 48,719 units.

Our Perspective:

A revival in economic activity, cyclical recovery underway in the CV space, pick-up in retail sales volume (March 2022 retails at ~93% of pre-Covid levels), robust demand in PV segment amid improving chip supplies and interim rise in key raw material and crude prices due to geopolitical crisis were the key highlight for Q4FY22E. Building in conservative estimates we build in ~50 bps decline in gross margins for Q4FY22E. However, a sequential uptick in volume is expected to largely offset the same. In Q4FY22, we expect robust performance at Ashok Leyland and Maruti Suzuki while 2-W players viz. Hero MotoCorp and Bajaj Auto are expected to disappoint, owning to sequential decline in volumes as well as rise in aluminium prices during the quarter. For Ashok Leyland, with significant operation leverage at play, EBITDA margins at seen expanding impressive 200 bps QoQ to 6% in Q4FY22 with consequent PAT expected at Rs 203 crore vs. Rs 6 crore in Q3FY22. On the Maruti Suzuki (MSIL) front, we expect EBITDA margins to expand 70 bps resulting in 35% QoQ PAT growth at Rs 1,362 crore. This is expected to be highest PAT reading at MSIL in the last five quarters. Management commentary on demand prospects, especially amid recent fuel price hike, impact on gross margins due to recent steep rise in commodity prices and transition towards electrification will be key monitorables from the upcoming quarterly results.

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