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Automobile - Results Preview - EBITDA margin expansion - Key thing to watch out for
Despite festive season, volume growth performance was a mixed bag in 3QFY16 as two wheeler players registered dismal growth in volumes. We attribute weak two wheeler sales to the subdued demand from the rural segment margin, given BAL/HMCL/TVSM registered -3.4%/2.5%/7.5% change in volumes, respectively on yoy basis.
However, four wheeler players performed relatively better than two wheeler players, w...hich in our view was due to uptick in urban replacement demand during the festive season. MSIL / M&M automotive/ TML (SA) registered 15.5%/ 15.4%/ -3.1% yoy change in volumes, respectively.
The flood in Chennai had disrupted (vehicle / vehicle parts) production in Chennai region. In our view, the deluge has not severely impacted dispatched volumes, may be due to existing inventory. As kharif season was subdued and Rabi season sowing is lacklustre (4.7% yoy down as on January 01, 2016), we do not foresee sharp uptick in rural demand in near term.
Considering the soft commodity price trend, we largely assume EBITDA margin expansion for most of the players in 3QFY16. However, if this could not materialise in the actual performance of the players, it would increase the risk aversion, given the absence of sharp gross margin expansion could stem the EBITDA margin expansion.
Moreover, in case of inadequate benefits of soft commodity prices, OEMs may report lower than expected earnings growth.