Auto sector in Q2 sees better profitability led by raw material savings and cost efficiency, 2HFY24 to be better
- Margin tailwinds contributed to a positive end to 2QFY24 corporate earnings, driven by domestic cyclical sectors like cement, automobiles, banking, financial services, and insurance (BFSI). Auto industry saw YoY growth of 112%, led by M&M, Maruti Suzuki, and Tata Motors.
The domestic brokerage Motilal Oswal Financial Services reported in its Q2 results review report that margin tailwinds contributed to a broad outperformance across aggregates that marked the end of the 2QFY24 corporate earnings on a positive note. The beat was driven by domestic cyclical like cement, automobiles, banking, financial services, and insurance (BFSI).
The auto industry saw a noteworthy year-on-year (YoY) growth of 112% (compared to an expected growth of +87%), led by Mahindra & Mahindra (M&M), Maruti Suzuki, and Tata Motors.
“The quarter saw upgrades for FY24E, mainly to incorporate the advantages of improved gross margin and cost efficiencies, which ultimately supported overall profitability,” the brokerage said.
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The brokerage claims that even though there was an inventory buildup for the festive period last year, which fell relatively earlier, the auto volumes in 2QFY24 were flat YoY. Strong growth in MHCVs, traction in SUV demand, and an early recovery in 2Ws were the main drivers of the positive performance.
Hence, wholesales for 3W/PV/CV increased roughly 11%/6%/4% YoY, while those for tractors/2Ws/LCVs decreased by 4%/3%/1% YoY. The volume of MHCV increased by roughly 15% year over year. Exports and domestic volume fell 6% and 2%, respectively, in the second quarter. Price increases and volume growth drove a 15% YoY increase in total revenue for the brokerage's Auto Universe (ex-JLR).
Benefits from foreign exchange, operating leverage, and decreasing inflation in commodity costs were the main drivers of EBITDA's 42% year-over-year growth. The quarterly adjusted profit after taxes (PAT) increased 59% year over year.
Going forward, based on growth in festive volumes, a stable macro outlook that benefits MHCV demand in particular, order backlog execution in PVs, and a sustained recovery in 2W demand followed by a ramp-up in exports, the brokerage expects 2HFY24 to outperform 1H.
Gross margin improved for fifth consecutive quarter, fully reflects the benefits of softening raw material (RM):
The brokerage reported that gross margin for Auto OEMs (ex-TTMT) increased by roughly 420 basis points (bp) YoY and 220 bp QoQ to 28.7%, which now precisely reflects the advantages of moderating RM costs. While acknowledging a minor increase in RM expenses, the majority of the companies stressed that this would not have a major effect on the cost. EBITDA margin increased by 240bp YoY/90bp QoQ to 12.3% as a result of this, which was further supported by increased efficiencies and FX benefits.
“We believe full benefits of low RM costs reflected in 2QFY24 as initial trends in 3QFY24 indicate a slight increase in metal prices. However, we believe this should partially be offset by operating leverage and further cost control. For companies with global operations (especially in EU), inflationary pressure continues to ease with a softening in commodity prices as well as energy costs, while benefits of volume recovery will be seen in the coming quarters,” the brokerage said.
Exports – Headwinds continue
According to the brokerage, exports continued to face pressure in the second quarter of FY24, citing comments from management. In 2Q, the majority of the companies reported a slow but steady recovery. Despite difficulties arising from the macroeconomic environment, demand is projected to gradually improve in 2HFY24, which will benefit overall utilisation and profitability in the future.
Valuation and view
“We prefer 2Ws within the sector followed by CVs. We are already witnessing a demand reversal, especially in the 2W segment, which we believe has better growth potential compared to other segments over FY23-25E. On the other hand, we turn cautious on the PV growth outlook due to a slowdown in demand and a high base. Tata Motors and Hero MotoCorp are our top original equipment manufacturer (OEM) picks. Among auto component stocks, we prefer Endurance Technologies and Craftsman Automation,” the brokerage said.
Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.
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Business NewsIndustryAuto sector in Q2 sees better profitability led by raw material savings and cost efficiency, 2HFY24 to be better
First Published:16 Nov 2023, 12:02 PM IST
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