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MOSL: AUTOMOBILES 1QFY19 PREVIEW-Demand intact; rural sales healthy; EBITDA margin to expand for fourth consecutive quarter

Automobiles 1QFY19 PREVIEW: Demand intact; rural sales healthy; EBITDA margin to expand for fourth consecutive quarter

 

• Healthy volume growth momentum continued in 1QFY19 – 2Ws grew 15% YoY, 3Ws grew 67% YoY, UVs grew 21% YoY, and CVs grew 50% YoY.
• EBITDA margin for our auto OEM (ex-JLR) universe is likely to expand (200bp YoY and 60bp QoQ to 13.8%) for the fourth consecutive quarter, as high commodity costs are offset by price increases and operating leverage. In 1QFY18, margins of OEMs were impacted by one-time GST-related compensation and discounts on BS-3 stocks.
• We have lowered our FY19/20 EPS estimates for by 10.5%/10.9% for TVSL, by 9.5%/13.3% for BHFC, and by 6.1%/4.3% for EIM to factor in for higher RM and tax.
• Our top picks are MSIL and MSS among large caps, and AL, ENDU and EXID among midcaps. We also believe that MM is the best play on rural market recovery.

 Healthy rural sales momentum driving auto volumes

Healthy momentum in rural areas and pick-up in construction/mining activities drove sustained recovery in volumes. Our channel checks indicate continued above-average volume growth in rural markets. This has resulted in strong 2W demand, which is estimated to have grown 15% in 1QFY19. CV volumes are being driven by pick-up in construction/mining activities and cyclical recovery in LCVs. CV volumes are estimated to have grown ~50%, with LCVs growing ~38% and M&HCVs growing 73%. PV demand grew ~16%, with ~14% growth in cars and ~21% growth in UVs.

 Fourth consecutive quarter of margin expansion – better product mix, operating leverage to offset RM cost inflation

EBITDA margin for our auto OEM (ex-JLR) universe is likely to expand (200bp YoY and 60bp QoQ to 13.8%) for the fourth consecutive quarter, boosted by price increases and operating leverage, despite RM inflation. We expect the highest YoY margin expansion for TTMT S/A (+700bp), MM (+280bp), AL (+210bp) and MSIL (+190bp); HMCL is likely to see margin contraction of 20bp YoY. On a QoQ basis, TVSL’s margin to expand by 80bp while that of EIM is likely to shrink by 60bp.