According to brokerage Prabhudas Lilladher, strong tailwinds from realisation, benign commodity prices, and operating leverage for a few OEMs can result in strong YoY revenue and improved margins as auto companies prepare to announce their second-quarter results.
IncredEquities, another brokerage, predicts that while sales volume momentum and commodity costs favor the profitability of the commercial vehicle and tractor segments, price discounts are a cause for concern.
They anticipate strong QoQ EBITDA growth for Ashok Leyland and Maruti Suzuki, but expect weakness in the growth of Escorts Kubota and Mahindra & Mahindra (M&M).
TVS Motor, Bharat Forge, and Hero MotoCorp are estimated to have lower EBITDA than consensus, according to the brokerage.
Auto industry revenue
The auto industry experienced overall flattish volumes of -1.1% in the second quarter of the current financial year due to a decline in two-wheeler and tractor sales.
Prabhudas Lilladher expects the aggregate revenue for the OEM sector to grow by 26% YoY in the second quarter, thanks to a sharp rise in ASP from price hikes, higher volume, and a better mix. They also expect the EBIDTA margin for this segment to expand 320bps YoY, driven by lower commodity costs and a superior product mix.
The brokerage believes that since commodity prices are still benign, they will continue to aid margins.
Auto industry volume
According to Prabhudas Lilladher, the volume performance of the industry has been uneven in the quarter under review.
In the second quarter, the volumes of three-wheelers, personal vehicles, and commercial vehicles increased.
The PV industry grew 5% YoY, with the SUV segment leading the way.
Mahindra & Mahindra gained a market share of 165 bps in the PV industry, while Tata Motors lost a market share of 110bps, according to the brokerage.
The CV industry saw a 7% YoY growth in the second quarter, with Tata Motors and Maruti losing market share, while Ashok Leyland and VE Commercial Vehicle gained it.
The medium and commercial vehicle (M&HCV) segment in Q2 continued to outperform its previous performance due to strong end-user industry demand.
The tractors industry declined, with domestic tractors sales dropping by 2.7% YoY and as high as 21.7% QoQ.
The two-wheeler industry saw a de-growth of 3.7% YoY due to lower exports and a delayed festive season.
However, two-wheeler export demand increased by 12% QoQ.
Three-wheelers continued to show strong growth in the domestic market YoY, while exports remained weak.
Auto industry revenue
Prabhudas Lilladher predicts that PVs and CVs will lead the OEM segment in terms of revenue in Q2, but export-focused and lower CC-focused two-wheeler OEMs are expected to show lower growth.
They anticipate strong growth for Maruti Suzuki (+23%), Mahindra & Mahindra (+21%), and Ashok Leyland (+18%); double-digit growth for TVS Motor, Tata Motors, and Eicher Motors; and mid single-digit growth YoY for Bajaj Auto and Hero MotoCorp.
Among the Ancs, they expect double-digit growth for Bharat Forge, Exide, and Endurance Technologies, while single-digit growth is expected for CEAT.
Prabhudas Lilladher brokerage also expects the aggregate EBITDA margin for OEMs to grow by 200bps YoY (excluding Jaguar Land Rover), driven by an improved mix, operating leverage, and lower commodity prices.
They anticipate a built-in higher margin across OEMs YoY in the range of 100bps-400bps and 60bp to 590bps for Ancs.
How commodity prices will play a part
According to Prabhudas Lilladher, major commodity prices remained flattish or declined during 2QFY24 sequentially.
Base metals saw the most decline, with nickel dropping by 9.2% and zinc by 5.1% QoQ, while steel and iron remained flattish QoQ.
The brokerage expects the impact of commodity prices to remain benign for the third quarter.
Brokerage ratings
IncredEquities ratings
IncredEquities maintains an ‘Overweight’ rating on the auto sector with a preference for OEMs.
They reiterate their rating on the sector due to the Nifty Auto Index trading below its 10-year mean P/E level and expectations of volume recovery from the festive period excitement and sustained strength in macroeconomic factors.
The brokerage’s preferred ADD-rated stocks are Bajaj Auto, Ashok Leyland, Maruti Suzuki, and M&M, while Tata Motors and Escorts Kubota are their key REDUCE-rated stocks.
Prabhudas Lilladher ratings
The brokerage introduced FY26E, rolled forward its target price (TP) to September 25, and adjusted its FY24-25E earnings in the range of -5% to +6% to account for quarterly volumes, increased competitive intensity, and lower-than-expected volumes in some segments.
They maintain a ‘Buy’ rating on Maruti Suzuki (TP: Rs 11,500; previous: Rs 11,100), AL (TP: Rs 220; previous: Rs 225), Tata Motors (TP: Rs 760; previous: Rs 760), Mahinda & Mahindra (TP: Rs 1,775; previous: Rs 1,760), and Bharat Forge (TP: Rs 1,170; previous: Rs 1070).
They maintain an ‘Accumulate’ rating on Eicher Motors (TP: Rs 3,729; previous: Rs 3,520), TVS Motor (TP: Rs 1,560; previous: Rs 1,400), Hero MotoCorp (TP: Rs 3,575; previous: Rs 3,535), Exide (TP: Rs 295; previous Rs. 295), and Endurance Technologies (TP: Rs 1,820; previous: Rs 1,725).
They upgraded CEAT to ‘Accumulate’ from ‘Hold’ (TP: Rs 2,450; previous: Rs 2,430) given the recent correction in the stock.
They also maintain a ‘Reduce’ rating on Bajaj Auto (TP Rs 4,750; previous: Rs 4,575).
