Auto Sector Q2 Results Preview: Cheaper input costs, higher realisations to drive revenue, margins
- The overall volumes in Q2FY24 for the auto industry were flattish, weighed down by a decline in two-wheeler and tractor sales. The volume performance during the quarter remained uneven with three-wheelers, passenger vehicles (PV) and commercial vehicles (CV) showing growth.
The automobile companies are expected to see a decent revenue growth and margin improvement in the quarter ended September 2023, driven by strong tailwinds from realization, operating leverage for few OEMs and benign commodity prices.
The overall volumes in Q2FY24 for the auto industry were flattish, weighed down by a decline in two-wheeler and tractor sales. The volume performance during the quarter remained uneven with three-wheelers, passenger vehicles (PV) and commercial vehicles (CV) showing growth.
According to brokerage firm Prabhudas Lilladher, in Q2FY24, the PV industry grew by around 5% YoY, led by the SUV segment. OEMs. The CV industry grew by around 7% YoY, as M&HCV segment continued to outperform led by strong end-user industry demand.
The Tractor industry saw a decline in the September quarter with domestic tractor sales dropping by 2.7% YoY and 21.7% QoQ. Two-wheeler industry saw a de-growth of 3.7% YoY on the back of lower exports and a delayed festive season.
The brokerage expects aggregate revenue of auto companies under its coverage to grow by 26% year-on-year (YoY) owing to sharp rise in average selling price from price hikes, higher volume and better mix and.
Strong growth was seen for Maruti Suzuki India (+23%), Mahindra & Mahindra (+21%) and Ashok Leyland (+18%), double digit growth for TVS Motor Company, Tata Motors, Eicher Motors, while Bajaj Auto and Hero MotoCorp should see mid-single digit growth YoY, it said.
Meanwhile, commodity costs continue to remain benign which should continue to aid margins. It expects EBITDA margin to expand by around 320 basis points (bps) YoY led by improving mix, operating leverage, lower commodity prices.
“Festive season is the next major catalyst for the automobile industry, while the expectations are high and initial trends for regional festive periods have shown positive momentum, a lot depends on the one-month festive period which starts from mid-October. OEMs have built inventory in anticipation of strong growth and higher retails would be key to avoid a large inventory backlog post the festive season,” Prabhudas Lilladher said in a report.
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Top Picks
The brokerage’s top picks in the automobile sector are Maruti Suzuki India, Tata Motors and Ashok Leyland.
Maruti Suzuki
Maruti Suzuki India, the largest passenger car manufacturer in India, is likely to see revenue growth of 23% YoY in Q2FY24 due to 6.7% improvement in volumes and higher realisation of 16% YoY.
The company’s net profit is estimated to rise 44.5% YoY to ₹2,978.6 crore, while EBITDA margin may increase by 180 bps YoY to 11.1% due to lower input cost and higher operating leverage, according to Prabhudas Lilladher.
The brokerage has a ‘Buy’ rating on the stock with a target price of ₹11,500 per share.
Tata Motors
Tata Motors’ revenue growth is expected to be at 37% YoY with strong volume growth at JLR and India business and increased realisation. Consolidated EBITDA margin at 14.7% is expected to increase by 380 bps YoY in the quarter ending September 2023.
The brokerage has a ‘Buy’ call on Tata Motors with the target of ₹760 per share.
Also Read: Tata Motors Q2 Update: Global wholesales up 7% to 3.4 lakh units, JLR volume rises 29% YoY
Ashok Leyland
Ashok Leyland’s revenue is expected to grow by 18% YoY due to volume increase of 10% YoY. EBITDA margin may increase to 10.4%, up 390 bps YoY led by operating leverage, lower input costs. The company’s net profit is expected to increase by 189% YoY to ₹560.2 crore.
Prabhudas Lilladher has a ‘Buy’ rating on the stocks with a target price of ₹220 per share.
Going ahead, upcoming festive season, stable pricing environment across segments, improving sentiment in the rural and urban markets translating to demand for discretionary products, low base for some of the segments, would act as key tailwinds for the sector. Headwinds include the impact from increase in interest rates, rise in inflation, increase in competition, fall-out from weak global macro resulting in slowdown in growth in the Indian economy, as per the brokerage.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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