The Indian auto sector, which has been hampered by higher commodity prices and semiconductor shortages since the beginning of the year, may finally see margins accelerate in the second quarter due to a fall in input prices, higher-than-expected festive demand, a lower base, and a strong recovery in sales.
The wholesale volumes in the PV/CV/2W segments were strong QoQ in Q2FY23, driven by inventory channel filling ahead of the holiday season. The domestic wholesale volumes for SUVs in passenger vehicles and premium motorcycles in 2W exhibited strong traction on the back of the improvement in the supply-chain bottlenecks as well as due to shifting consumer preferences towards premium, feature-laden, and technologically advanced product categories from the low-end segment, said Axis Securities in its auto sector Q2 preview note.
The CV segment also reported a robust recovery in demand, aided by improving fleet operators’ profitability and higher fleet utilisation levels. While the PVs' demand momentum remains healthy, supported by a strong order book and easing supply chain constraints. The semi-conductor availability has improved, and further structural improvements can be expected over H2FY23. Demand for domestic 2Ws saw an uptick as the OEMs filled channel inventory to meet the festive demand, said the brokerage.
The rural demand, however, has not picked up yet, primarily due to uneven and deficient monsoons in states having higher rural exposure. On the other hand, 2W exports de-grew in the quarter due to the slowdown witnessed on the African continent, it added.
Meanwhile, the prices of major commodities such as aluminium, steel, and precious metals have corrected over the quarter, which will positively impact the gross margins of auto OEMs and ancillaries. Axis Securities expects this impact to reflect a quarter lag from Q3FY23E onwards.
In Q2FY23, The brokerage firm anticipates auto OEMs under its coverage to report revenue growth of 12% QoQ and 33% YoY. It expects the revenue to grow QoQ mainly due to, Double-digit growth in the PV volumes on account of easing supply constraints and inventory buildup led by higher expected festive demand, Double-digit volume growth in the CV segment due to upcycle and pick up in the infra activities. Strong double-digit QoQ volume growth delivered by all 2W OEMs except Hero MotoCorp led by inventory channel filling for the festive season and De-growth reported in the sales volume by the tractor OEM (Escorts) segment on a QoQ basis.
Axis Securities expects the EBITDA margin under its coverage to grow by 32% QoQ while PAT will improve by 46% QoQ. For auto ancillaries under its coverage expects a 31% YoY and 10% QoQ revenue growth on account of recovery in 2W/3W, PV, and the CV industry, production volumes.
“We expect EBIDTA and PAT to improve by 22% and 34% QoQ, respectively, on account of multiple tailwinds such as a correction in RM cost inflation, improved chip supplies, and operating leverage,” said Axis Securities.
In the PV segment, the domestic brokerage firm expects new product launches, especially in the SUV segment by various OEMs, to sustain demand momentum and it anticipates CV volumes to remain healthy, led by robust last-mile connectivity and e-commerce demand, and it expects the CV demand momentum to also continue in Q3FY23.
For H2FY23, Axis Securities maintains a positive outlook for the auto sector and expects gross margins to expand, driven by higher operating leverage, easing chip supply, and RM tailwinds with commodity prices correcting.
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