SHAREKHAN SPECIAL
Q2FY2013 Auto earnings review
Subdued Q2; expect recovery in H2FY2013
Key points
Earnings boosted by M&M and Apollo Tyres
In Q2FY2013, the aggregate revenues of the automobile (auto) companies under our active coverage reported a revenue growth of 12.7% and a net profit growth of 6.3% as compared with the corresponding period of the previous fiscal. Given the prevailing tough macro-economic conditions, the performance appears to be robust due to a strong growth reported by both Mahindra and Mahindra (M&M) and Apollo Tyres. Excluding M&M, the aggregate revenue growth drops to 4.9% and the earnings decline by 2.5% as most of the other companies reported a decline at the profit after tax (PAT) level.
Auto companies including those under soft coverage report profit decline
Similarly, Sharekhan's auto tracking universe (including nine companies under soft coverage) saw a revenue growth of 13.2% year on year (YoY) but reported an earnings decline of 2.2% YoY. Ex M&M, the revenues grew by 11.1% while the profit declined by 6.2% during the quarter under review.
ALL added to our conviction list on robust Q2FY2013 performance
During the last three months, most of the stocks under our coverage, except M&M, had been kept on Hold recommendation. We recently added Ashok Leyland Ltd (ALL) to our Buy list due to an improved growth and margin outlook (refer to our Stock Update on ALL dated November 9, 2012).
Apollo Tyres, M&M and Suprajit outperform on earnings front
Most of the companies under our tracking universe reported an earnings decline as a moderating revenue growth resulted in operating de-leverage which affected the profitability. Only M&M amongst the original equipment manufacturers (OEMs), and Apollo Tyres and Suprajit Engineering (Suprajit) in the ancillary space reported an earnings growth during the quarter. Exide Industries (Exide) reported a jump in the earnings mainly due to the low base effect of the corresponding period of the previous year.
Outlook and valuation
We expect the automotive volumes to recover in H2FY2013 on the back of the festive season in Q3FY2013 and an improved economic outlook with the easing of the interest rates expected in Q4FY2013. Raw material prices are expected to remain subdued. With a recovery in the volumes, the benefits of operating leverage are expected to result in a margin improvement in H2FY2013. M&M remains our preferred pick in the auto sector.
