Metal Pains are Auto Gains

The global commodity slowdown, especially in China, the world's largest metal consumer, has seen aluminium prices falling 12 per cent and steel prices declining by 22 per cent (YoY). That's bad for miners and steel companies, which find themselves face to face with the double whammy of lower offtake and weaker realisations.

The situation is so bad that multiple commodities, including aluminium, iron ore, copper and zinc, now trade close to their lowest levels seen in late 2001. With the Chinese economy taking a breather, things are likely to get tougher for metal companies. That's because China accounts for close to 45-50 per cent of the global metal consumption. Metal companies could take an earnings hit of as much as 29 per cent, estimates JM Financial.

While metal and mining companies fret about falling realisations, there is one group of companies that is enjoying the decline in metal prices. That group is auto manufacturers.

Auto companies are among the biggest gainers of the fall in metal prices. According to the table below, Maruti, M&M, Tata Motors and Ashok Leyland count among the biggest gainers in EBITDA margins as a result of lower metal prices (Source: JM Financial).

In terms of earnings per share, the biggest gainers include Ashok Leyland, with a 12 per cent gain in FY16 earnings per share; TVS Motors, with a 6.5 per cent gain; and M&M, with a 5.6 per cent gain.

The benefits from lower metal prices have already started trickling in. Maruti, the country's top passenger vehicle manufacturer, reported a 40 basis point jump in EBITDA margins (QoQ) in the last quarter of FY15. A recent report by research house CLSA pegged Maruti's margins to jump from 13.6 per cent in FY15 to 17.2 per cent by FY17 on the back of a number of factors that included a weaker yen, higher demand, operating leverage benefits and lower commodity prices.

The table below looks at how other auto manufacturers stand to gain in the future both at the margin and earnings-per-share levels as a result of the fall in metal prices.