The auto sector's Q2FY25 performance was shaped by varied trends across segments, with original equipment manufacturers (OEMs) reporting muted topline growth due to sustained weakness in the Commercial Vehicle (CV), Passenger Vehicle (PV), and global luxury segments.
Tyre companies also struggled with margin pressures as rising rubber prices impacted their operating performance. Meanwhile, bearing companies had a mixed quarter, with margin challenges overshadowing revenue gains.
Diversified auto ancillaries, on the other hand, saw robust earnings growth during the September quarter, according to domestic brokerage firm Kotak Institutional Equities' latest report.
The brokerage said that the aggregate revenue of auto OEMs under its coverage universe was up 2% YoY in Q2FY25, driven by a double-digit YoY increase in 2W segment volumes, a richer product mix, and price hikes, which were partly offset by a 9% YoY decline in the CV sales volumes, a 1% decline in PV sales volumes, and a 10% YoY decline in the JLR business.
Tyre companies, especially MRF, Balakrishna Industries, and CEAT posted strong revenue growth, partly due to channel filling, but the brokerage noted that overall profitability growth was muted owing to RM headwinds and obligations pertaining to EPR.
However, it expects the margins to recover from Q4FY25E, as the rubber prices have corrected by 18-20% in the past one month.
Further, the brokerage stated that the bearing companies under its coverage universe reported a 12% YoY revenue growth in Q2FY25, driven by strong performance in the railway segment (Timken), aftermarket division (SKF, Timken, Schaeffler), higher two-wheeler production volumes (SKF), and robust export growth (Schaeffler India).
However, EBITDA margins contracted by 100–220 basis points across SKF, Timken, and Schaeffler, leading to a modest 4% YoY growth in EBITDA and a 1% YoY increase in PAT during the quarter.
Kotak further highlighted that the diversified auto ancillaries under its coverage universe posted a 12% YoY revenue growth in Q2FY25, driven by strong two-wheeler production volumes and steady replacement segment growth.
EBITDA (excluding Samvardhana Motherson) rose 10% YoY, supported by operating leverage benefits and a richer product mix. Gross margins improved by 220 bps YoY, aided by the enhanced product mix and favourable raw material costs, it noted.
According to the brokerage, international and domestic natural rubber prices (spot) have corrected 25% and 18%, respectively, in the past month, as the domestic tyre manufacturers abstained from the procurement of domestic rubber as the domestic prices were trading at a premium to international rubber prices, which led to price adjustment in the domestic market.
Additionally, it highlighted that the European Union's decision to delay the implementation of deforestation regulations by 12 months also contributed to the decline in international rubber prices.
Meanwhile, spot metal prices showed mixed trends, with steel and copper declining by 3-4% and aluminum rising by 10% compared to 1QFY25 average levels. The increase in aluminum prices is attributed to China cancelling tax incentives on aluminum exports.
If the current metal and rubber prices sustain at current levels, Kotak anticipates a margin expansion of 30-80 basis points for PV, CV, and tractor OEMs, while 2W OEMs may see a 20-basis points margin contraction due to higher aluminum content.
It said tyre companies could benefit significantly, with a projected margin expansion of 200-250 bps, assuming no changes in pricing. Furthermore, the sharp depreciation of the yen against the Indian rupee is expected to reduce the cost of imported raw materials, aiding in margin expansion for Maruti Suzuki India from 2HFY25 onward.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
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