FREE

MOSL: AUTOMOBILES 3QFY19 PREVIEW-Speed-breakers in the form of weak demand, higher marketing cost

AUTOMOBILES 3QFY19 PREVIEW: Speed-breakers in the form of weak demand, higher marketing cost; OEMs facing margins pressure for second straight quarter

 

• All auto segments faced demand headwinds in 3QFY19 on account of increased cost of ownership due to (a) rising fuel costs, (b) an increase in insurance cost and (c) higher cost of financing. Moreover, stress at the farm level and consequent weak rural sentiment led to lowest festive sales in 4-5 years, particularly in 2Ws/PVs.
• EBITDA margin for our OEM (ex-JLR) universe is likely to contract by 140bp YoY (-70bp QoQ) to 12.6% owing to RM inflation, currency depreciation and higher variable marketing expenses. All OEMs – except MM (+20bp YoY/+50bp QoQ) – are likely to see YoY margin contraction – BJAUT (-330bp), MSIL (-260bp), AL (-250bp), HMCL (-160bp), EIM (-140bp) and TTMT S/A (-90bp).
• We have lowered our FY19/20 EPS estimates for AL (by 11% each), EIM (6%/9%), TVSL (7%/4%), HMCL (5%/6%) and MM (4%/7%).
•  Increased ownership cost hurts demand, particularly in PVs/2Ws: All auto segments faced demand pressure in 3QFY19, as cost of ownership increased due to higher fuel, insurance and financing costs. Moreover, sales in the festive season were the worst in 4-5 years, particularly in the 2W/PV segments, as lower farm income dampened rural demand. CV demand momentum faced hurdles in the form of an increase in axle load and financing issues. 
• Margins to contract for second consecutive quarter: EBITDA margin for the Auto OEM (ex-JLR) universe is likely to contract by 140 bp YoY (-70 bp QoQ) to 12.6% due to RM inflation, FX depreciation and an increase in variable marketing expenses. We expect MM’s margin to expand by 20bp YoY (+50bp QoQ), but all other companies to report margin contraction on a YoY basis – BJAUT (-330bp), MSIL (-260bp), AL (-250bp), HMCL (-160bp), EIM (-140bp) and TTMT S/A (-90 bp). Consequently, PAT is expected to decline for the first time in six quarters by 5.6% YoY (-23.7% QoQ).