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MOSL: AUTOMOBILES 4QFY19 Preview-Demand trends remain weak across segments

Automobiles 4QFY19 Preview: Demand trends remain weak across segments; OEMs facing margin pressures for the third straight quarter

 

• All auto segments faced demand headwinds in 4QFY19 – a trend similar to the previous quarter. Increased ownership cost and stress at the farm level hampered buying sentiment, particularly in 2Ws/PVs.
• EBITDA margin for our OEM (ex-JLR) universe is likely to contract for the third consecutive quarter by 120bp YoY (+30bp QoQ) to 12% due to negative operating leverage and higher variable marketing expenses. While almost all OEMs (except TVSL and TTMT S/A) are likely to see YoY margin contraction, MSIL, AL and BJAUT are expected to deliver a QoQ margin recovery of 220bp, 80bp and 40bp, respectively.
• We have lowered our FY20/21 EPS estimates for EIM (12%/6%), TVSL (10%/17%), TTMT (23%/19.5%), ENDU (4%/8%) and MSS (8%/9%). 

Increased ownership cost and farm stress continue hurting demand, particularly in PVs/2Ws: All auto segments faced demand headwinds even in 4QFY19, continuing the trend of weak retails in the previous quarter. Not only increased ownership cost but also stress at the farm level hampered buying sentiment, particularly in 2Ws/PVs. Consequently, inventories were at record levels across segments (highest in the 2W segment at 60-70 days). 

Negative op. leverage, higher variable marketing spend to exert margin pressures for third consecutive quarter: EBITDA margin for our Auto OEM (ex-JLR) universe is likely to contract by 120 bp YoY (+30 bp QoQ) to 12% due to negative operating leverage and an increase in variable marketing expenses. All OEMs are likely to witness margin contraction on a YoY basis – BJAUT (-320bp), MM (-360bp), EIM (-280bp), HMCL (-240bp), MSIL (-220bp) and AL (-70bp) – barring TVSL (+30bp) and TTMT S/A (+230bp). Consequently, PAT is expected to decline (by a significant 20% YoY or 11.5% QoQ) for the first time in seven quarters.