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Thursday, April 7, 2011

Stock_for_YOU Fwd: FW: Sharekhan Special: Q4FY2011 Auto earnings preview




Sharekhan Special
[April 07, 2011] 


Summary of Contents


Q4FY2011 Auto earnings preview 

  • Escalation in commodity prices the big question...: With the Q4FY2011 volumes known and the revenue growth almost predictable, the focus area for the Indian automobile sector would be the sustainability of the operating profit margin (OPM). Heightened competitive intensity across segments has expanded the market size but hampered the pricing power of the market leaders in the hinterland. The preference of sustaining market share over maintaining margins has created a high-growth, low-margin environment. In Q4FY2011, the revenue of Sharekhan's automobile universe is expected to grow by 22% year on year (YoY). However, the EBIDTA would grow by just 3.6% YoY and PAT by a modest 7.1% YoY. 
  • ...the answer lies in the kerb weight: Q4FY2011 is likely to place the automobile companies in two different worlds from the margin perspective. While margin erosion seems universal, the extent of the impact of the same would be phenomenal for some and marginal for the others. The perplexity could be simplified by observing the kerb weight (Annexure-Case study on two wheelers). We estimate that the selling price per kg (derived from the MRP and the kerb weight) and the product mix in different price segments would determine the magnitude of the margin erosion for these companies. We expect Hero Honda to be the most vulnerable in the automobile original equipment manufacturer (OEM) space as cost escalation would severely bite the margins of the large volume, low-priced bikes.
  • The key monitorable is contribution per vehicle: We observed that the contribution per vehicle is most vulnerable for companies whose product mix is tilted towards the entry segment (lower selling price per kg). The conversion cost will severely erode the profitability. 
  • Q4FY2011 outperformers and underperformers: Companies that are expected to shield their contribution or gross margin include Bajaj Auto, Maruti Suzuki and Mahindra and Mahindra in the automotive OEM space and FAG Bearings in the auto ancillary space. These remain our sector outperformers as well as preferred picks. Our key underperformers from the Q4FY2011 results? perspective are Hero Honda, Apollo Tyres and Subros.

Click here to read report: Sharekhan Special

The Sharekhan Research Team

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