Auto firms set for a downhill stride in Q2

July-September is expected to be one of the worst quarters in a decade with pressure across segments, as OEMs focused on inventory reduction.

Published: 11th October 2019 08:33 AM  |   Last Updated: 11th October 2019 08:33 AM   |  A+A-


For representational purposes

Express News Service

With vehicle sales hitting new lows and most automakers cutting down production to keep inventory levels at check, the profits and revenues of a majority of automobile companies are expected to drop in double-digit figures during the second quarter of the financial year 2019-20, say analysts.

In a recent note, brokerage house Prabhudas Lilladher said the inventory correction and production cuts during the second quarter of the fiscal have led to sharp decline in volumes across segments and will continue to dent financial performance of auto firms. 

“We expect the impact of negative operating leverage and product mix to be partially offset by easing of commodity inflation, cost control initiatives and positive forex. Consequently, for our auto OEMs’ (original equipment manufacturers) universe (ex-Jaguar Land Rover), we expect year-on-year (YoY) revenue/EBITDA/PAT decline of -26%/-37%/-44% with margins contracting by ~200 bps YoY,” the Prabhudas Lilladher said. 

Likewise, analysts at Motilal Oswal said Q2FY20 is expected to be one of the worst quarters in a decade with pressure across segments, as  OEMs focused aggressively on cutting inventory.

“Auto universe’s profit after tax (PAT) is expected to decline 37 per cent YoY in Q2FY20 off a weak base (down 25 per cent YoY in Q2FY19), a sixth consecutive quarter of double-digit PAT decline. Ex-Tata Motors, Auto universe’s PAT is expected to be down 24 per cent YoY,” Motilal said in its Q2FY20 preview.

Motilal Oswal expects the EBITDA margin to shrink 270 basis points YoY to 9.2 per cent, impacted by weak operating leverage and higher discounts.

It said 12-16 companies are expected to report a PAT decline, while Tata Motors is expected to post loss. 

Analysts at the firm also expects Bajaj Auto and TVS to deliver stable sequential margins, but is of the view that Maruti Suzuki, Ashok Leyland, Tata Motors and Eicher Motors are likely to be worst impacted by the slump in auto sector, with margins dropping up to 750 basis points.

Prabhudas Lilladher said it expects Bajaj Auto to be the only OEM to see margin expansion quarter-on-quarter (QoQ).

“While all OEMs are to see margins contraction QoQ, we expect Bajaj Auto’s margin to expand ~60bp QoQ (-110 bps YoY) to 16 per cent. Among other OEMs, Hero MotoCorp, Mahindra & Mahindra and Maruti Suzuki India margins are to decline QoQ by 50bps/ 60bps/ 40bps to 13.9%/ 13.4%/ 10% respectively,” it said. 

Despite almost all the carmakers offering huge discounts during the ongoing festival season, dispatches by OEMs in September was weak. 

Maruti saw its domestic PV sales decline 27 per cent last month to over 1.1 lakh units, while Mahindra & Mahindra sold 14,333 PVs in September 2019, down 33 per cent YoY. Tata Motors’ sales in domestic markets tumbled nearly 50 per cent to 32,376 units, while two-wheeler major Hero MotoCorp’s sales fell over 20 per cent to 6.12 lakh units.


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