MOSL: AUTOMOBILES 2QFY18 Preview-Regulatory impact waning – retail improving gradually-Strengthening commodity prices could exert pressure

​AUTOMOBILES 2QFY18 Preview: Regulatory impact waning – retail improving gradually; Strengthening commodity prices could exert pressure on margins in 2HFY18

• Regulatory actions had materially influenced auto volumes since 3QFY17. However, given the waning regulatory impact, the automobile sector has witnessed gradual volume growth August onward, supported by pre-festive inventory build-up and improving rural sentiment.
  
• Our channel checks indicate healthy retail growth in key segments like PV and 2W. However, its sustainability can be threatened by below-average monsoon in the key markets of UP (-29%), Bihar (-9%) and MP (-20%).
  
• EBITDA margin for our auto OEM (ex-JLR) universe is likely to contract (-100bp YoY; +160bp QoQ) for the fourth consecutive quarter to 13.4%. This is without any impact of an increase in commodity prices (which is expected to be realized in 2HFY18).
  
• We have lowered our FY19 EPS estimates for AMRJ (-13%), and increased for BJAUT (+7%) and ENDU (+4%).
  
• Our top picks are TTMT and MSIL among large caps, and AL and AMRJ among mid-caps. We also believe that MM is the best play on a rural market recovery.