Auto Ancillaries Q2FY19 preview: Margin pressure to persist, pricing power will be key

Rising input prices to dent margins for India-focused players, trade turmoil threatens globally oriented companies

Oct 12, 2018 03:10 IST India Infoline News Service

Automobile ancillary
The Automobile ancillary sector faces a double whammy this quarter. Firstly, slower demand (volume) in Q2FY18, especially in Passenger Vehicles (PVs) and Two-wheelers (2Ws), will impact earnings for ancillary companies that cater to these OEMs. Secondly, companies that have significant exposure to regions affected by ongoing trade tariff war between China and USA could face headwinds. The only solace will be for companies that cater to Commercial Vehicles (CVs) in India, since this space has continued to grow and remained unscathed so far despite global and domestic headwinds.

On the whole, Auto ancillary players will be impacted by high input costs, delayed festive season and sluggish growth for auto OEMs - due to rising fuel price, tight liquidity conditions (making financing difficult), higher upfront vehicle cost (due to increase in third-party insurance premium) and uneven rainfall in the country.
 
Following is a summary of company-wise performance expectations for Q2FY19:
Bharat Forge Rs Cr yoy qoq
Revenue 1,551 23.3% 4.8%
EBITDA 465 25.8% 8.4%
EBITDA Margin (%) 30.0 59bps 100bps
PAT 254 24.9% 8.5%

Bharat Forge will benefit from (i) strong CV volume growth in domestic market and (ii) robust growth momentum in North America Class 8 trucks. Commodity cost pass-through will shield margins for the company. Tonnage growth will be driven by recovery in oil and gas segment. In the current scenario of domestic and global headwinds, this company is favourably poised since it caters to those segments (India and abroad) which are currently having strong growth prospects.

Motherson Sumi Rs Cr yoy qoq
Revenue 14,680 9.3% -0.6%
EBITDA 1,433 14.6% 7.8%
EBITDA Margin (%) 9.8 45bps 76bps
PAT 536 22.9% 21.0%

Motherson Sumi (MSSL) will report single-digit revenue growth at the consolidated level, due to lower volume growth for SMR and SMP. Some of MSSL’s clients such as JLR, Daimler, BMW, Audi have issued profit warnings, which does not augur well for MSSL. WLTP transition could affect volumes for MSSL’s OEM clients in Q2FY19 and Q3FY19; however, will bounce back sharply post that. The company will consolidate Reydel acquisition in Q2FY19. Domestic business will continue to remain strong. 

Endurance Technologies Rs Cr yoy qoq
Revenue 1,874 15.7% 0.7%
EBITDA 270 18.0% -0.4%
EBITDA Margin (%) 14.4 28bps -16bps
PAT 126 26.5% 1.2%

Endurance to benefit from strength in 3Ws and 4Ws. Volume growth for 2Ws has slowed in Q2FY19, though it continues to be in the green. Flat growth in European operations on a constant currency basis will lead to consolidated revenue growth of 16% yoy, lowest in past four quarters. However, better operating efficiency will keep EBITDA growth strong (18% yoy) with 28bps yoy EBITDA margin expansion.
 
MRF Rs Cr yoy qoq
Revenue 4,040 12.5% 4.8%
EBITDA 600 -1.0% 0.8%
EBITDA Margin (%) 14.8 -202bps -59bps
PAT 289 -3.6% 10.8%
 
We expect healthy revenue growth for MRF in Q2FY19 due to strong growth in underlying OEM segments and price hikes taken by the company. However, EBITDA margin will contract ~200bps yoy as input cost pass-through comes with a lag. 

CEAT Rs Cr yoy qoq
Revenue 1,738 14.1% 1.9%
EBITDA 175 0.1% -0.6%
EBITDA Margin (%) 10.1 -141bps -25bps
PAT 75 0.8% 9.0%

Revenue growth will be led by healthy growth in tonnage across segments. Raw material cost inflation will weigh on margins. Company is currently in an aggressive capex stage, investing Rs1,500cr in FY19E and Rs1,000-1,500cr in FY20E. Hence, depreciation and interest costs will weigh on PAT.

Apollo Tyres Rs Cr yoy qoq
Revenue 4,156 19.5% -3.1%
EBITDA 484 32.9% -8.3%
EBITDA Margin (%) 11.7 117bps -66bps
PAT 210 49.8% -16.6%

Apollo will report strong 20% yoy revenue growth in Q2FY19 led by good tonnage growth in domestic CVs and ramp-up in Hungary operations. Operating leverage will lead to 117bps yoy EBITDA margin expansion; however, high crude oil prices will lead to 66bps sequential margin contraction. 

Balkrishna Industries (BKT) Rs Cr yoy qoq
Revenue 1,405 26.1% 3.1%
EBITDA 404 32.5% 13.0%
EBITDA Margin (%) 28.8 140bps 251bps
PAT 229 13.0% -0.4%

Robust volume growth to steer revenues for BKT as demand continues to remain robust for OHT in BKT’s target markets. The ongoing Rupee depreciation makes import of OHT tyres expensive, benefitting BKT. Intermittent price hikes will lead to EBITDA margin expansion. Street will keenly watch volume guidance for FY19E.

Exide Industries Rs Cr yoy qoq
Revenue 2,742 15.6% -1.1%
EBITDA 388 31.0% -0.8%
EBITDA Margin (%) 14.1 166bps 4bps
PAT 218 60.6% 3.7%
 
Revenue will be steered by healthy volume growth in automotive OEMs and replacement segment. In the industrial segment, Exide will gain market share in telecom and solar segment, while growth in inverter and UPS segment will be in single digits. Margin expansion will be aided by price increase taken to pass through costs and decline in lead prices. 
 
Amara Raja Batteries (AMRJ) Rs Cr yoy qoq
Revenue 1,674 17.3% -5.9%
EBITDA 232 -2.7% 5.2%
EBITDA Margin (%) 13.8 -284bps 146bps
PAT 123 -3.6% 8.5%
 
Revenue will be steered by healthy volume growth in automotive OEMs and replacement segment. While lead price has corrected by almost 6% sequentially and has remained flat yoy, AMRJ will see margin decline due to a high base of the year ago quarter when margin was close to 17%. Investors will look out for more clarity on the new agreement with Johnson Controls for advanced lead acid batteries. Also, pricing action prevailing in the duopolistic battery sector will be keenly watched. 

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