Q3FY11 performance of Indian automobile sector is expected to be a mixed bag with wide variation in performance of various players. Despite robust volume growth during the quarter, financial performance of the automobile sector is likely to be adversely impacted by high raw material cost. On high base of last year, we expect profitability of the automobile sector to decline barring companies like Mahindra & Mahindra and TVS Motor. However on a sequential basis, we see stability in the operating margins. Commercial vehicle manufacturer Ashok Leyland is facing the impact of emission norm induced lull in demand and this will lead to profit degrowth during the quarter. We remain positive on the automobile sector due to strong economic growth. Our top picks in the sector are Mahindra & Mahindra, Bajaj Auto and TVS Motor.

Ashok Leyland (AL): Lower volumes due to emission norm changes will adversly impact profitability by 250bps. PAT estimated to decline by 34% to Rs693mn.

Bajaj Auto (BJAUT): We expect BJAUT to maintain its operating margins above 20%. Reported PAT to grow by 28% to Rs6.1bn.

Hero Honda (HH): Higher raw material cost to continue to impact profitability despite robust volume growth. PAT at Rs5.8bn to grow for the first time during the current year.

Maruti Suzuki (MSIL): Higher royalty charges and raw material cost to impact performance. PAT seen down by 9% to Rs6.2bn.

Mahindra & Mahindra (M&M): Strong volumes and rich mix to improve margins by 111bps. PAT to have an impressive growth of 70% to Rs7bn.

TVS Motor (TVSL): Higher volumes and richer product mix to expand margins by 75bps to 7%. Profits are estimated to more than double to Rs598mn.