India’s Auto Parts Makers May Be Insulated From Domestic Slowdown
Fall in raw material costs and replacement demand will aid fourth-quarter earnings of auto parts makers, according to brokerages, even as makers of passenger vehicles and two-wheelers grapple with a slowdown.
“We expect auto component companies under our coverage to report a relatively better quarter with 8 percent year-on-year revenue growth and 5 percent Ebitda growth in the fourth quarter of FY19,” Hitesh Goel, auto analyst at Kotak Institutional Equities, said. “This is due to exposure to a steady and profitable aftermarket.”
That comes when automobile makers battle a slowdown since the festival season last year, causing inventories to rise. While volumes showed recovery in March, according to data released by dealers’ lobby, sales were still down over a year ago.
Brokerages expect an uptick in operating profits of key Indian auto ancillary firms despite slowing auto sales in India and Europe.
Exide Industries Ltd. and Amara Raja Batteries Ltd. are likely to see their margins expand mainly due to fall in lead prices, Kotak Institutional Equities said. Demand from the replacement market is expected to cushion them from the auto slowdown, the brokerage said. Multinational companies like SKF India Ltd. and Wabco India Ltd. are expected to see 9-15 percent growth in the domestic replacement market which would drive their earnings in the fourth quarter.
“The benefit would be limited to companies with a good distribution network or reach through automakers’ service centres,” Mahantesh Sabarad, head of retail research at SBICAP Securities, told BloombergQuint. “Typically, battery and tyre companies are the ones which benefit the most from the replacement demand.”
Aurangabad-based maker Endurance Technologies Ltd. said it is likely to see growth in overall sales, given the strong growth in supplies to Bajaj Auto Ltd., one of its key customers. Domestic sales growth for Bajaj Auto’s motorcycle segment stood at 17 percent in the March-ended quarter, according to the company’s stock exchange filing.
Bharat Forge Ltd. is expected to see a 17 percent revenue growth from exports on a yearly basis, according to Kotak Institutional Equities. Varroc Engineering Ltd.’s VLS Unit and Motherson Sumi Systems Ltd.’s SMR arm are expected to clock sales growth of 25 percent and 4 percent, respectively, on account of traction from the European market.
Higher Costs To Hurt Tyremakers
Brokerages expect sales growth for tyre companies but operating profit is expected to remain under pressure. For Apollo Tyres Ltd., both domestic and European sales are expected to grow 9 percent, driven by double-digit growth in the trucks and bus tyre segment and capacity expansion of its Hungarian operations.
Revenue for MRF Ltd. and Ceat Ltd. is expected to rise 8 percent and 7.6 percent, respectively, over the year-ago period, according the average of estimates compiled by Bloomberg. Profit, however, is expected to decline 12 percent and 28 percent, respectively, on the back of margin pressure, lower average selling prices and rise in price of commodities like natural rubber.