The domestic auto industry is hoping that the Reserve Bank of India (RBI) will not increase interest rates in its next policy review. Most two-wheeler companies reported lower sales (y-o-y basis) in December.

In this backdrop, what can one expect from the December 2011 quarter results of Bajaj Auto (BA) and Hero MotoCorp (HMC)? Here is a sneak peek into what brokerages expect from the results due today.


AMBIT CAPITAL

For Bajaj Auto, year-on-year (y-o-y) sales will be driven largely by volumes (y-o-y growth of 13.6 per cent) and balance by realisation growth arising from price hikes and mix benefits. EBITDA margin is likely to improve marginally q-o-q on account of price hikes and better mix).

As regards Hero MotoCorp, Ambit expects margins to see improvement on a y-o-y basis on account of low base effect of Q3FY11.


STANDARD CHARTERED

The research house feels Honda’s intention to enter the 100cc segment in CY12 is likely to directly impact HMC’s key executive segment from FY13 onwards. Further, increase in operating expenses (re-branding, R&D, adspend, etc) is likely to limit margin expansion going forward. HMC outperforms the industry with 18 per cent y-o-y growth YTDFY12 followed closely by Bajaj Auto at 15 per cent. Volume outlook is strong, but cost pressure (n re-branding, R&D investments, ad-spend etc) to limit margin expansion.

However, for Bajaj Auto they say robust export demand and strong 3W sales momentum is likely to offset slowdown in domestic sales for the company. The recent price hike in domestic and export markets and the sharp INR depreciation is expected to negate the impact of DEPB withdrawal. “We prefer Bajaj over HMC given much better earnings visibility (steady volume ramp-up + stable," their report says.


KOTAK INSTITUTIONAL EQUITIES

It expects Bajaj Auto’s volumes to increase by 14 per cent y-o-y. EBITDA margin may improve by 60bps q-o-q driven by exports (increase in operating margins given sharp depreciation of the Rs versus the dollar), neutral product mix and stable raw material prices.

For Hero MotoCorp, the expected increase in volumes is 11 per cent y-o-y. “We expect the EBITDA margin to increase by 20 bps q-o-q due to a decline in raw material costs and neutral product mix offset by higher royalty costs due to a sharp appreciation in the Yen versus the Rupee," their report states.


EDELWEISS SECURITIES

The key aspect to watch out for is the margins of two-wheeler companies where concerns over a slowdown in sales are emerging, notes a result preview report from the research house. Bajaj Auto is their top pick in the automobile sector given its high exports, diversified business model, strong balance sheet and a high dividend yield.

For Bjaj Auto, they have assumed 2.8 per cent for domestic business and 9 per cent growth for export markets in blended realisations for the quarter on sequential basis with forex contracts as a key monitorable for FY13 and demand guidance for FY13.

Meanwhile, in Hero MotoCorp, they expect average realisation to dip by ~1 per cent on sequential basis. “The key thing to watch out for is margins given that quality of volume growth is suspect," they add.


MOTILAL OSWAL

For Bajaj, analysts at Motilal Oswal Research expect net sales to grow 23 per cent y-o-y to Rs 5,140 crore and expect 4.2 per cent y-o-y increase in realisations, given the price increases of ~3.5 per cent in the export market in Oct-11 and better export realisation due to the Rupee depreciation and 1 per cent additional export incentive for 2HFY12. The EBITDA margin is likely to increase 50bp q-o-q to 20.6 per cent (~30bp y-o-y) while the PAT at Rs 839 crore is likely to rise ~26 per cent y-o-y.

They estimate net sales for HMC at Rs 5,880 crore, up 15 per cent y-o-y. “EBITDA margin (adjusted for change in royalty accounting) is expected to decline 10bp Q-o-q at 11.4 per cent as impact of softer commodity costs is offset by higher royalty due to Japanese Yen’s appreciation. PAT is pegged at Rs 620 crore (up ~26 per cent y-o-y)," their report says.