Auto Industry Q2 Results Preview: Strong tailwinds from realisation, benign commodity prices, and operating leverage for a few OEMs can translate into strong Year-on-Year (YoY) revenue and improved margins as the auto companies are set to announce their respective second-quarter results soon, says brokerage Prabhudas Lilladher.

COMMERCIAL BREAK
SCROLL TO CONTINUE READING

In its forecast for the September quarter, another brokerage, IncredEquities, says that while sales volume momentum and commodity costs favour the commercial vehicle and tractor segments’ profitability, price discounts are a cause for concern.

It is expecting strong EBITDA quarter-on-quarter (QoQ) growth for Ashok Leyland and Maruti Suzuki, while predicting weakness in the growth of Escorts Kubota and Mahindra & Mahindra (M&M).

In its EBITDA estimates, the brokerage is below consensus for TVS Motor, Bharat Forge, and Hero MotoCorp.

Auto industry revenue

In the second quarter of the current financial year, the auto industry saw overall flattish volumes of -1.1 per cent due to a decline in sales of two-wheelers and tractors.

Prahudas Lilladher expects the aggregate revenue for the original equipment manufacturer (OEM) sector to grow by 26 per cent YoY in the second quarter courtesy a sharp rise in ASP from price hikes, higher volume, and a better mix. For the same segment, the firm expects EBIDTA margin to expand 320bps YoY led by lower commodity costs and a superior product mix.

The brokerage says since commodity prices are still benign, they can continue to aid margins.

Auto industry volume

Prahudas Lilladher says the volume performance of the industry has remained uneven in the quarter under review.

The volumes of three-wheelers, personal vehicles, and commercial vehicles increased in the second quarter.

The PV industry grew 5 per cent YoY with the SUV segment being the frontrunner.

While Mahindra & Mahindra gained a market share of 165 bps in the PV industry, Tata Motors lost a market share of 110bps, the brokerage says. 

The CV industry saw growth of 7 per cent YoY in the second quarter with Tata Motors and Maruti losing market share while Ashok Leyland and VE Commercial Vehicle gained it.

Strong end-user industry demand strengthened the medium and commercial vehicle (M&HCV) segment in Q2 as it continued to outperform its previous performance.

The tractors industry, meanwhile, declined, with domestic tractors sales dropping by 2.7 per cent YoY and as high as 21.7 per cent QoQ.

Lower exports and a delayed festive season affected the two-wheeler industry, as it saw a de-growth of 3.7 per cent YoY.

The two-wheeler export demand jumped 12 per cent QoQ.

Three-wheelers continued to show strong growth in the domestic market YoY, while exports remained weak.

Auto industry revenue 

Prabhudas Lilladher says while PVs and CV can lead the OEM segment in terms of revenue in Q2, export-focused and lower CC-focused two-wheeler OEMs are expected to show lower growth. 

Strong growth can be seen for Maruti Suzuki (+23%), Mahindra & Mahindra (+21%) and Ashok Leyland (+18%); double-digit growth can be seen for TVS Motor, Tata Motors, and Eicher Motors; while Bajaj Auto and Hero MotoCorp can see mid single-digit growth YoY.

Amongst the Ancs, it sees double-digit growth for Bharat Forge, Exide, Endurance Technologies, while single-digit growth is expected for CEAT as per the brokerage.

Prabhudas Lilladher brokerage also expects the aggregate EBITDA margin to grow by 200bps YoY (excluding jaguar Land Rover) for OEMs, led by an improved mix, operating leverage, and lower commodity prices.

The build-in higher margin across OEMs YoY is expected to be in the range of 100bps-400bps and 60bp to 590bps for Acns.

How commodity prices will play a part

Prabhudas Lilladher says major commodity prices were flattish or showed a decline during 2QFY24 sequentially.

Base metals declined the most with nickel dropping by 9.2 per cent and zinc by 5.1 per cent QoQ, while steel and iron were flattish QoQ.

The brokerage says the outlook on the impact of commodity prices will remain benign for the third quarter.

Brokerage ratings

IncredEquities ratings

IncredEquities has maintained an 'Overweight' rating on the auto sector with preference for OEMs.

It said that it had reiterated its rating on the sector as the Nifty Auto Index is trading below its 10-year mean P/E level and volume recovery is expected 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 its key REDUCE-rated stocks are Tata Motors and Escorts Kubota.

Prabhudas Lilladher ratings

The brokerage introduced FY26E, roll forwarded its target price (TP) to September 25 and adjusted its FY24-25E earnings in the range of -5 per cent to +6 per cent to factor in quarterly volumes, an increase in competitive intensity, and lower-than-expected volumes in some segments.

The brokerage has maintained its ‘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).

It has maintained its ‘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).

It has upgraded to ‘Accumulate’ from 'Hold' on CEAT (TP: Rs 2,450; previous: Rs 2,430) given recent correction in the stock.

It has also maintained ‘Reduce’ on Bajaj Auto (TP Rs 4,750; previous: Rs 4,575).