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Topline growth to moderate to mid-single digits; lowest growth in the past nine quarters: The automobile sector growth ex-TAMO is likely to moderate sharply and more than halve to 4% in Q4FY2019 (Q3FY2019
growth was 10%). Q4FY2019 growth is the lowest since Q3FY2017. Slowing economic growth, uncertainty before general elections, a financing crunch and increase in the cost of ownership (due to mandatory insurance costs) have impacted volumes across automotive segments. PV and CV segment volumes were flattish during Q4FY2019.

The 2W segment was the worst impacted with the volumes dropping by 8%. Inventory correction and slowing economic growth dented the volumes. While the automobile OEM volume offtake was weak, strong replacement and export sales at ancillaries and price hikes taken by OEM’s significantly offset the impact of a volume slowdown. In our universe, TVS Motors and Ashok Leyland (NS:ASOK) are expected to outperform reporting growth of 7% and 6% respectively due to market share gains. Hero Motocorp and Eicher Motors (NS:NS:EICH) are expected to underperform reporting a decline of 9% and 2% respectively due to market share loss. Export-focused ancillaries like Bharat Forge (NS:NS:BFRG) and Motherson Sumi and tyre players are expected to outperform the automobile industry growth posting close to double-digit topline growth.

Margin decline trend to continue due to higher commodity and discounts & operating deleverage: earnings growth to turn negative: Q4FY2019 would witness the continuation of margin decline trend with 160 bps YoY drop in margins expected (ex-TAMO). Higher commodity costs and increased marketing expenses in the wake of sharp volume deceleration and OEMs efforts to gain market share would weigh on the margins. Further, operating deleverage on the back of a mere 4% growth in-universe topline is expected to impact the margins of the automotive universe. Operating profit of the universe is expected to drop 7% YoY. Bajaj Auto (NS:NS:BAJA) and HeroMotocorp are likely to see the maximum impact with the margins dropping by 410 and 260 bps respectively. In contrast, TVS Motors is expected to post 90 bps margin improvement driven by cost control initiatives. Tracking the weak operating performance, we expect automobile universe Net Profit to decline 8% YoY. This is the first instance of earnings drop in the last six quarters.

OutlookEarnings pressures to sustain in the near term given muted volume outlook:Automobile volumes have been under pressure across the segments. Slowing economic growth, increasing ownership costs due to regulatory changes (mandatory insurance and enhanced safety norms) coupled with uncertainty before the general elections have impacted the volumes. Given the weak consumer sentiments and continued higher inventory levels in the passenger segment (passenger vehicles and 2 wheelers), we expect automotive sales to remain muted in Q1FY2020 as well. With subdued volumes, we expect higher discounting and operating deleverage to continue to maintain pressure on earnings.

Earnings outperformers: Ashok Leyland, Exide Industries (NS:NS:EXID)

Earnings Underperformers: Hero Motocorp, M&M, Apollo Tyres (NS:APLO)

NOTE : This artical written by Finvyu on

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