The auto ancillary space is seen outperforming the Original Equipment Manufacturers (OEM) led by better margin profile in the third quarter of the financial year 2023, believes brokerage house ICICI Direct Research.
According to the brokerage, the ancillary pack's sales are expected to fall by 2 percent quarter-on-quarter (QoQ) with nearly 120 basis points expansion in Earnings Before Interest, Taxes, Depreciation, and Amortisation (EBITDA) margins, and consequent profit after taxes (PAT) de-growing 2 percent QoQ.
The weak topline performance has been mainly caused by a QoQ volume decline in the domestic market and weak export sentiment.
However, Apollo Tyres is anticipated to post a strong performance in Q3FY23, principally reflecting a QoQ increase in the margin profile in domestic sector while maintaining a high double-digit margin profile in the European business.
On the other side, the brokerage predicts a nearly 10 percent QoQ fall in the total industry volumes for the auto or OEM sector in Q3FY23, primarily as a result of the subpar performance in the 2-wheeler and passenger vehicle space.
"Considering the magnitude of raw material price decline (metals, plastics down nearly 20%, 50%, respectively, from Q1FY23), and quarterly time lag in its impact on profit and loss amid management commentary guiding raw material benefits to accrue from H2FY23, we expect gross margins to improve in range of 100-250 basis points QoQ for our coverage in Q3," said the brokerage.
The brokerage in its report said that Ashok Leyland is expected to lead the OEM or auto pack and report a robust performance in Q3FY23 amid 5 percent sequential rise in volumes for the quarter at 47,562 units.
As per the brokerage report, Balkrishna Industries is anticipated to record a weak performance in Q3FY23 due to a QoQ reduction in volumes and expensive raw material inventory on books.
Similarly, Uno Minda is expected to report a muted performance in Q3FY23 primarily tracking muted QoQ wholesale dispatches in the passenger vehicle and 2-wheeler segment amid calendar year change.
Bharat Forge is expected to report a steady performance on a QoQ basis tracking a marginal decline in exports amid macro instability and steady growth in domestic sales across segments namely automobile and industrial among others, according to the brokerage.