Auto Sector Q3 Results: Expect weak outcomes, says HDFC Securities

Auto Sector Q3 Results: On account of the increase in the cost of ownership and higher inventory at dealers level the third quarter of the FY 2019 looks weaker for the auto sector, reports an HDFC Security study. The report says automobiles sector will report weak number in Q3 led by the increase in the cost of ownership (higher fuel prices, insurance, and financing costs) and higher inventory at dealers level. Channel inventory for 2Ws and PVs remained elevated at 6-8 weeks, forced OEMs (original equipment manufacturers) to offer aggressive incentives to clear inventories.

EBITDA margin (OEM universe) to contract 200bps YoY (-128 bps QoQ) to 13.4 percent, impacted by negative operating leverage, weak INR and heightened competitive intensity in 2Ws and PVs. Companies that are expected to record subdued earning performance includes Ashok Leyland (-34 percent YoY), Maruti Suzuki (-6 percent) and Hero MotoCorp (-4 percent), while Baja Auto to register decent growth (+11 percent).

Abhishek Jain, Analyst at the HDFC Securities informed in a written press statement to the Zee Business online, "We expect the operating performance for most auto OEMs to bottom out in 3QFY19, led by demand normalization due to softening fuel prices, improving liquidity and new product launches.

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In addition, healthy rural sales and pick-up in economic activities will support volume growth over the longer term." Jain further expected that the PV and 2W segments to see a gradual improvement in volumes in the coming months led by softening fuel prices and improving liquidity issue, strong rural demand; marriage season demand and recovery in the volume of flood-affected state like Kerala.

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Although, there were some hiccups in the last two month we, expect CV growth to pick up led by traction in E-commerce, mining, and infrastructure segment.

On his top picks among the auto majors, Abhishek Jain of HDFC Securities responded, "Our top picks in OEMs space are MSIL (extensive distribution network and strong rural franchise), Ashok Leyland (leadership in high tonnage trucks) and Baja Auto (diversified product and geographical mix)."