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Automobile Industry To Face Cost Inflation Issues

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An increase in base commodity prices may have an impact on the margins of auto industry, while many may look to offset the same by increase in prices and lower discounts, Motilal Oswal has said in its latest report on the automobile sector.

"Spot prices of base commodities saw a sharp increase (15-40%) over 2QFY21. Considering 3-6 month contracts, we expect the impact of base commodity prices to reflect in the P&L from 3QFY21 onwards. Base commodity price inflation would have a 350-400bp gross impact over the next 2-3 quarters.

Automobile Industry To Face Cost Inflation Issues
 

Precious metals (platinum, palladium and rhodium) are facing a double whammy of a huge increase in usage due to BS-VI compliance and a sharp rise in prices. This is particularly true for rhodium where spot prices are higher by 28%/70% over 1HFY21/FY20 on an average," Motilal Oswal has said in its report.

While cost inflation is fairly large, OEMs are focusing on more than offsetting the same through: a) price increases (of 1-6% in 2Ws, Tractors, and PVs), b) lower discounts (100-400bp across segments), c) cost cutting (80-100bp), and d) operating leverage (150-170bp).

"Putting all negatives and positives together, we expect EBITDA margin to improve to 13.3% by FY23E (v/s 10.5% in FY20 and 12.7% in FY19) as the impact of commodity cost inflation is more than offset by benefits of price increases, lower discounts, cost cutting initiatives, and operating leverage.

With a likely pick-up in volumes (higher asset turns), margin improvement, and lower capex intensity, we expect a sharp improvement in FCF generation over FY21-23E. For our Auto OEM (excluding JLR) universe, FCF conversion (% of PAT) is estimated to be at 100-125% over FY21-23E (as against 20%/33% in FY20/FY19)," the report states.

"Analysis of past cycles suggests that valuations expand as the cyclical recovery sustains, laying the foundation for the next upcycle. Current valuations reflect an early to mid-cycle recovery, with scope for a further rise if the volume expansion sustains. MM is our top OEM pick. Among Auto Components, we prefer ENDU and MSS," Motilal Oswal has stated.

Read more about: automobile motilal oswal
Story first published: Wednesday, January 13, 2021, 9:47 [IST]
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