>AUTOMOBILE SECTOR: Q4FY12 Result Preview

Strong revenue growth to drive up earnings


We expect a strong quarter for auto companies under our coverage universe* driven by 30.5% revenue growth YoY and 14% QoQ. We expect EBITDA margins to expand by 59bps YoY but expect this to contract by 26bps QoQ. Among large-cap auto stocks, Tata Motors and Hero MotoCorp is likely to be the best performers followed by Bajaj Auto. Overall, we expect net profit to increase by 35% YoY and 27% QoQ in 4QFY12E for the companies under our coverage universe.


Key Highlights:
■  Volume momentum to be strong for 4W: During the quarter, volume momentum for 4W companies has remained strong (up 13% YoY and 25% QoQ) compared to two-wheeler companies (up 6% YoY but down 2.5% QoQ, in line with overall slowdown witnessed by the industry).


■  Margins a mixed bag: Input cost pressure is likely to remain higher on both YoY and QoQ basis. However, strong volume growth for most of the companies will largely help to offset cost pressures. For our coverage universe, we expect EBITDA margins to expand by 59bps YoY, but contract 26bps QoQ. We expect a sharp sequential improvement in margins for both Maruti and Ashok Leyland led by strong volume recovery for both companies. For M&M, we expect sustained margin pressure on account of an adverse mix (lower tractor sales). We expect Tata Motors to drive sector growth with strong 67% earnings growth driven by 44% YoY growth in revenues and 186bps margin expansion YoY.


■  Strong revenue growth to drive strong earnings growth: We expect adjusted PAT to register a growth of 35% YoY and 27% QoQ. Among large-cap auto stocks, Tata Motors and Hero MotoCorp are likely to be the best performers, followed by Bajaj Auto.


■  Valuations and recommendations: We continue to remain positive on Bajaj Auto in the 2W space and on Mahindra & Mahindra and Maruti in the 4W space. We maintain our Hold rating on Hero MotoCorp and Tata Motors and maintain Sell on Ashok Leyland.

RISH TRADER