Automakers face further earnings downgrades on weak earnings, low volumes

Volume growth across segments has been either flat or negative for most companies, with two-wheelers bearing the brunt

Though the BSE Auto index has shed over 23 per cent from its highs a year ago, it could see more downward pressure on the back of downgrade triggers. While muted volumes going ahead is one such pain point, the March quarter (Q4) earnings season is another reason why the Street would not fancy auto makers as well as auto component suppliers.

Volume growth across segments has been either flat or negative for most automobile companies, with two-wheelers bearing the brunt. Slowdown in demand triggered due to the rising cost of ownership and issues related to financing of vehicles have hit the sector hard. While the 50-basis-point rate cut in 2019 is positive for the auto sector, particularly two-wheelers, it may not fully offset weak growth until election uncertainty passes, say Jigar Shah and Vikram Ramalingam of Kim Eng Securities.

Weak retail demand and excess inventory with dealers could keep volume offtakes muted for a while. Normal level of inventory stocking could hence take a few more months to achieve. Most brokerages believe volume growth, which has been on a downtrend the past few quarters will revive by the second half of CY19. This is on the back of pre-buying ahead of BS-VI emission norms which comes into effect in April next year, and a subsequent pick-up in demand. 

The other downside for the sector is earnings cuts post Q4 results. Analysts say that sluggish demand will result in companies either spending more to get customers or offering discounts to offload stocks. This will impact margins both, due to weak realisation and negative operating leverage. The extent of this factor will be known as Q4 results are published by auto makers. 

Says Arya Sen of Jefferies India, “Weak economies of scale, higher discounts will hurt margins and profits. While earnings estimates have come down materially, we expect some more cuts post earnings across auto makers.”

The biggest earnings cuts are expected for two-wheeler makers Hero MotoCorp and TVS Motor, with the two likely to see downgrades of 12 per cent or more. Among other players Tata Motors and its overseas subsidiary Jaguar Land Rover or JLR are likely to post 30-35 per cent decline in operating and net profit.