Auto companies stare at muted earnings in Q3 amid high input costs

Chip shortage, poor two-wheeler demand and high input costs set to be spoilers

It’s going to be a quarter of muted earnings for auto companies yet again.

While a persistent chip shortage dented sales of passenger vehicles, commercial vehicles and premium two wheelers, poor demand plagued the scooter and motorcycle makers during the quarter.

Moreover, higher raw material prices also hit earnings. Owing to a cyclical upturn and an underlying recovery in the commercial vehicles (CV) segment, those with exposure to CVs and three wheelers are set to benefit.

A Bloomberg poll of analysts expects average net profit at auto companies to contract by 42 per cent year-on-year (YoY) to Rs 5,041 crore. This is even as net sales is expected to rise to Rs 1.5 trillion from Rs 1.42 trillion. 

Meanwhile, earnings before interest, tax, depreciation and amortisation (EBITDA) — a key measure of profitability — is also expected to fall to Rs 16,864 crore for the three months to December from Rs 20,741 crore in the corresponding quarter. This is due to a steep hike in raw material prices.  

Analysts believe, with some of the headwinds behind, the auto sector will see improvement across segments.

“We expect the automobile industry to witness a volume improvement across segments, from the current low level. This is on the back of higher vaccination coverage,” wrote Mitul Shah, vice-president, research, at Reliance Securities.

Though some improvement is expected in semiconductor supply, the problem will persist for the next 1-2 quarters, he added.

Shah expects the medium and heavy commercial vehicles (M&HCV) industry to record a strong growth and stage a bounce-back with less than 30 per cent YoY growth in FY22E.

Ashok Leyland will be one of the key beneficiaries of the upturn. “We expect revenues to increase by 24 per cent YoY in the third quarter of FY22. This will be led by an increase in volumes on a low base. We see a 21 per cent YoY increase in the average selling price due to a higher mix of M&HCV and also because of price hikes,” an earnings preview report of Kotak Institutional Equities said.

Meanwhile, the pain for two-wheeler makers in the domestic market is expected to linger. This is because the rising number of Covid cases and renewed restrictions weigh on demand.

Two-wheeler volumes declined by 24 per cent owing to a moderation in sentiment as well as a high base last year. In comparison, exports saw Rs 1 per cent growth YoY despite the high base, driven by stable demand and steady forex rates in key markets.

“We expect 11 per cent revenue growth for Eicher Motors, 2 per cent for Bajaj Auto and 1 per cent for TVS. However, we see a 21 per cent fall for Hero MotoCorp. The momentum in exports is expected to be sustained. In comparison, domestic demand may be impacted in the near term by the increase in Covid cases. We expect volume growth to turn positive from Q1 of FY23,” wrote Raghunandan N.L of Emkay Global Research.