| SHAREKHAN SPECIAL Q1FY2012 Auto earnings review -
During Q1FY2012, Sharekhan's automobile (auto) universe grew its revenues by 19.8% on a year-on-year (Y-o-Y) basis. The growth leaders in the original equipment manufacturer (OEM) space were Mahindra and Mahindra (M&M) and HeroMoto Corp while bearing companies and Greaves Cotton reported a good double-digit revenue growth. -
Poor volumes affected the performance of Maruti Suzuki and Ashok Leyland Ltd (ALL) while Exide Industries (Exide) sprung a negative surprise amongst the auto ancillaries. -
Rising costs affected Sharekhan universe's OPM by 67 basis points YoY: All OEMs under the Sharekhan universe except HeroMoto Corp reported a margin decline year on year (YoY). The impact was most severe on M&M due to the high base of the corresponding quarter of the previous year. Amongst the auto ancillaries, FAG Bearings India (FAG), Greaves Cotton and Subros grew their margins on a Y-o-Y basis while Apollo Tyres and Exide disappointed the most with a sharp Y-o-Y decline in their margins. -
The overall operating profit grew by 13.9% YoY, at a lower rate than the revenue, hit by a 67-basis-point erosion in the operating profit margin (OPM). -
Earnings growth moderated but managed to stay in lower double digits: The profit after tax (PAT) for the Sharekhan auto universe managed to grow in lower double digits--lower than the Y-o-Y growth in both the operating profit and the revenue. High depreciation and interest charges affected the earnings growth. -
ALL and Apollo Tyres sprung maximum negative surprises. ALL's earnings declined by 29% YoY in spite of a 6.3% Y-o-Y revenue growth. Similarly, Apollo Tyres' earnings grew by just 3.9% YoY in spite of a 55% increase in the revenue growth. -
Bajaj Auto amongst the OEMs and FAG amongst the auto ancillary companies stand out in terms of earnings growth. -
Outlook and valuation: The auto sector is facing aggressive macro headwinds. The crucial festive season also looks vulnerable as the sector would face the lag impact of higher fuel prices and interest rates. We view medium and heavy commercial vehicles (MHCVs) and passenger cars as most vulnerable to these factors while light commercial vehicles (LCVs), two-wheelers and tractors still look promising. -
Based on earnings growth and one-year forward valuation, Exide is the most expensive while Suprajit Engineering (Suprajit) and Apollo Tyres are the most attractive. -
Keeping in view the quality of the earnings and the reasonable valuations, M&M amongst the OEMs and Greaves Cotton amongst the auto ancillary companies are our preferred bets within the Sharekhan universe. Q1FY2012 earnings review Key points -
The earnings growth of the Sensex companies in Q1FY2012 was marginally lower than expected. During the quarter the aggregate adjusted earnings of the Sensex companies grew by 7.5% year on year (YoY) as compared to our expectation of a 9.5% year-on-year (Y-o-Y) growth. This was because of the lower than expected performance of the pharmaceutical (pharma; Cipla), telecommunications (telecom; especially Bharti Airtel) and metal stocks. However, the shortfall in the earnings vis-a-vis our estimate was partly offset by a strong growth in the information technology (IT) services and fast moving consumer goods (FMCG) sectors and other stocks (JP Associates, Maruti Suzuki). -
Excluding the oil and gas companies, the Sensex' earnings grew at 7% compared to the expectations of an 8.8% growth on a Y-o-Y basis. Excluding State Bank of India (SBI), the Sensex' adjusted earnings grew by 12.4% as compared to the expectation of a 13.7% growth YoY which shows that generally the earnings were only marginally below expectations. -
The aggregate net sales growth of 26% was quite strong and higher than our estimate mainly led by a strong growth in Reliance Industries Ltd (RIL) and the real estate sector. The operating profit, however, grew by 13.5% in line with our expectations. The operating profit margin (OPM) for the Sensex companies declined by 249 basis points YoY to 22.6%, resulting in a slower growth in the operating profit. -
Though the companies have reported a strong growth in the top line, the earnings will continue to be under pressure due to the mounting interest rates and high input cost. The EBITDA margin of the Sensex companies declined by 249 basis points YoY and earnings are further downgraded by 2.5% during the result season. In view of the ongoing global turmoil and the pressure in the domestic economy due to the rising interest rates and high inflation more downgrades cannot be ruled out. Currently, the Sensex trades at close to 14x FY2012 revised earnings which is marginally below 15x its long term median multiple. |
