Better product lineups may help auto firms thrive

The volume share of utility vehicles in its domestic PVs in Q4FY23 stood at nearly 25% for Maruti versus 19% a year earlier (Photo: Bloomberg)
The volume share of utility vehicles in its domestic PVs in Q4FY23 stood at nearly 25% for Maruti versus 19% a year earlier (Photo: Bloomberg)

Summary

Apart from the lagged benefit of softening commodity costs, margins are likely to see tailwinds from operating leverage and a richer product mix.

Many automakers are expected to see a sequential expansion in operating margins in their March quarter (Q4FY23) results. Apart from the lagged benefit of softening commodity costs, margins are likely to see tailwinds from operating leverage and a richer product mix.

This trend would be particularly visible in the passenger vehicle (PV) and commercial vehicle (CV) segments. In PVs, there has been a demand shift towards high margin products such as utility vehicles. In fact, this has prompted Maruti Suzuki India Ltd to launch sport utility vehicles (SUV)— Grand Vitara and new Brezza in FY23. The volume share of utility vehicles in its domestic PVs in Q4FY23 stood at nearly 25% for Maruti versus 19% a year earlier.

Graphic: Mint
View Full Image
Graphic: Mint

In the CV segment, Q4 volume got a boost owing to pre-buying in anticipation of price hikes ahead of transition to Bharat Stage VI phase 2 norms. Further, the mix of high margin medium and heavy CVs has been increasing. The share of this type of CVs in companies such as Ashok Leyland Ltd and Tata Motors Ltd rose by 300-315 basis points sequentially in Q4. Ebitda margin of both the companies in the CV segment is expected to cross the 10% mark in Q4 from 8-9% in Q3.

In the case of Mahindra & Mahindra Ltd, the auto segment put up a good volume show in Q4. But this was offset by a sequential fall in volumes in the high margin tractor segment due to seasonality. This weaker mix would weigh on margin, though year-on-year performance is expected to be healthy.

Coming to two-wheelers, high margin export market continues to be a worry. This would adversely impact Bajaj Auto Ltd, but a growing share of three-wheeler volumes will provide some cushion. Besides the impact of exports, TVS Motor Company Ltd’s margin will be dented by a rising share of electric vehicles (EVs). Hero MotoCorp Ltd will benefit from operating leverage and price hikes.

Going ahead, margin trajectory is key to watch. As the chart alongside shows, prices of key commodities such as steel and aluminium were slightly up in Q4FY23 and hence Q1FY24 may see some cost inflation. However, the pressure may not be severe given most automakers have taken price hikes. But a sharp rise in commodity prices would play spoilsport.

Further, “PV companies would continue to see richer product mix but pace of divergence between SUVs and cars would slow down eventually," said Himanshu Singh, analyst at Prabhudas Lilladher. Also, pre-buying factor will not be available hereon to boost CV makers’ volumes and support margins. So, what company managements say about demand environment will be key, specially in PVs where there have been cues of moderation.

“Our dealer surveys indicate that new order inflows at PV dealerships have slowed down. With supply chain normalizing across most OEMs, inventory should normalize by June and advertising and promotional spends may begin to rise from Q2FY24," said analysts at Nomura Financial Advisory and Securities (India) in a report on 11 April. SUVs and EVs would continue to do well; hence, a strong model cycle would be important for market share gains, they added.

In two-wheelers, demand conditions in export markets and EV strategies hold key. Further, how rural demand pans out remains to be seen this year given the uncertainty surrounding monsoons. To be sure, the auto sector’s woes are gradually fading. This is reflected in the 21.5% appreciation in Nifty Auto index in the last one year. Further upside would depend on consistent volume performance and improving margin.

.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
more

topics

MINT SPECIALS