The overall revenue growth for companies (ex-Tata Motors) under coverage to remain flat YoY in Q3FY22, as volume growth was affected by temporary chip shortages in PVs and muted sentiments and a high base in 2-Wheelers/Tractors. In comparison, volume growth was strong for CV firms due to better freight availability/rates, as per a research report released by Emkay Global Financial Services.
Domestic CV industry volumes grew slightly by nearly 3 percent YoY. Emkay expects strong revenue growth of 20-35 percent for OEMs such as Tata Motors-CV, Eicher Motors-Volvo Eicher and Ashok Leyland. The research firm expects robust double-digit revenue growth in CVs for the next two years, supported by improving macros, government thrust on infra spending and recovery in replacement demand.
Domestic PV industry volumes declined by nearly 6 percent YoY, despite a large order-book, owing to chip shortages. Emkay expects revenue growth of 1 percent for Maruti Suzuki, 21 percent for M&M auto division (total revenue growth of 12 percent for M&M) and 67 percent for Tata Motors-Passenger Vehicles. Led by the pending order book and improving chip supplies, it expect revenues to grow strongly over the next two years.
Domestic 2-Wheeler industry volumes declined by nearly 24 percent YoY, owing to moderation in sentiments as well as a high base last year. In comparison, exports saw nearly 1 percent YoY growth, despite the high base, driven by stable demand and steady forex rates in key markets. Emkay expects 11 percent revenue growth for Eicher Motors-Royal Enfield, 2 percent for Bajaj Auto and 1 percent for TVS Motors, and a 21 percent fall for Hero MotoCorp. The momentum in exports is expected to be sustained. In comparison, domestic demand may be impacted in the near term by the increase in COVID cases. Emkay expects volume growth to turn positive from Q1FY23.
Domestic Tractor industry volumes fell nearly 15 percent YoY. In terms of revenue, Emkay expects a 7 percent drop for Escorts and 2 percent for M&M’s farm division. Led by a high base and lower government subsidy support, the volumes are expected to remain under pressure in the near-term.
Tata Motors is likely to register 2 percent YoY revenue growth, supported by a 45 percent jump in India PV/CV divisions. In comparison, JLR revenue (GBP) should decline by 13 percent, owing to chip shortages. EBITDA margins should contract by 700 bps, owing to lower margins in JLR and India divisions. Emkay expects strong revenue performance ahead for both JLR and India PV/CV divisions, supported by improving chip supplies and CV upcycle.
Ancillaries: Bharat Forge should see robust revenue growth of 45 percent YoY, driven by a pickup in the underlying CV and industrials segments. Companies that benefit from replacement demand, such as Exide, Amara Raja Batteries and Apollo Tyres, may see 7-18 percent revenue growth. Emkay expects Minda Industries to see 4 percent revenue growth, aided by growth in alloy wheels/sensor categories and improving content in other segments.
Aggregate EBITDA margins (ex-Tata Motors) should contract 320bps vs. Q3FY21, affected by commodity inflation and negative operating leverage. Regarding currency movement YoY, INR depreciation against USD is positive for Bajaj Auto/TVS Motor/Bharat Forge, JPY depreciation is positive for Maruti Suzuki/HeroMoto Corp, and GBP appreciation against INR should support translation gains in JLR. In comparison, Euro depreciation against INR should lead to translation losses for Motherson Sumi and Apollo Tyres. Emkay has retained their positive view on the auto sector, underpinned by expectations of a cyclical upturn in the next three years.
Emkay Global Financial Services is positive on Tata Motors (TP: Rs 550), Ashok Leyland (TP: Rs 160), Maruti Suzuki (TP: Rs 8,750) and TVS Motor (TP: Rs 800). In ancillaries, they are positive on Motherson Sumi (TP: Rs 300) and Bharat Forge (TP: Rs 950). The key downside risks: delay in economic recovery due to the third COVID-19 wave, further increase in commodity prices and adverse currency movement.
