In its Auto Q4 FY23 report, brokerage firm Axis Securities anticipates a slight improvement in gross margins for both auto OEMs (especially of commercial vehicles and passenger vehicles) and ancillary companies as a result of the drop in commodity prices during Q3 FY23.
According to Axis Securities, auto OEMs' revenue is expected to grow by 8% QoQ in Q4 FY23, primarily driven by double-digit growth in the commercial vehicle (CV) and passenger vehicle (PV) segments.
However, this growth may be partially offset by lower growth in the two-wheeler (2W) segment (led by lower exports) and tractors, it said.
Total vehicle sales of Ashok Leyland grew by 26% QoQ, driven by infra push, replacement demand, and pre-buying ahead of the OBD phase II norms. Total vehicle sales of Maruti Suzuki increased by 11% QoQ, which was led by higher sales of the SUV segment (up 38%/10% YoY/QoQ).
In the 2W segment, QoQ revenue growth is expected to remain flat for TVS, and Eicher Motors, led by de-growth of 1.3% each in sales volumes.
Bajaj Auto's revenue is expected to fall by 10% QoQ on account of lower sales volumes (down 13% QoQ) due to weaker exports.
Hero MotoCorp is the only standout in the 2W space, with revenue expected to grow by 5%, led by slightly higher sales (up 3% QoQ), the brokerage highlighted.
In the tractor segment, Escorts Kubota's revenue is expected to fall by 4% QoQ due to lower tractor sales (down 12% QoQ).
Overall, the brokerage anticipates the revenue, EBITDA, and PAT for auto OEMs under its coverage will increase 19%, 29%, and 29%, respectively, year on year. On a sequential basis, too, it expects auto OEMs to register a growth of 8%/11%/11%, which would be led by double-digit volume growth in the PV/CV segment (though this will be partially offset by lower 2W sales on account of lower exports).
Further, the EBITDA margins are expected to expand both YoY and QoQ due to a richer product mix, the absorption of price hikes, and marginally lower RM costs, it noted.
Auto-ancillary preview
Axis Securities estimates a 7% QoQ revenue growth for auto ancillary companies under its coverage on account of double-digit domestic growth in CV and PV volumes (being only partially offset by a decline in 2W export volumes).
It expects the EBITDA and PAT of its universe to improve by 13% and 21% QoQ, respectively, which would be driven by commodity tailwinds and premiumization trends.
The operating profit margins are expected to improve marginally by 60 bps QoQ, mainly due to the softening of raw material prices and increased production volumes in the CV and PV segments, said the brokerage.
Outlook
Although the brokerage maintains a positive outlook on the auto sector for FY24, it anticipates a more challenging landscape ahead. This is due to the subsiding of pent-up demand from FY23 over the low base of FY22 across segments.
Additionally, real-time driving emission norms from April 23 and safety regulations related to six airbags from October 23, along with higher interest rates, could pose further challenges to auto OEMs across segments by increasing the cost of acquiring vehicles.
Despite the budget's focus on infrastructure development, the high interest rates and rising fuel costs may act as headwinds to the CV industry. However, the brokerage expects PV sales volumes to sustain in FY24, primarily driven by new vehicle launches, particularly in the SUV category.
Nevertheless, it anticipates the growth rate to be moderate in FY24 due to the high base of FY23. The looming risk of El Nino, which is likely to impact the monsoon, will be a key monitorable for the 2W and tractor segments. As a result, Axis Securities remains selective in this sector.
Top picks
Axis Securities has identified several top picks for the long-term horizon based on key rationale. These include Maruti Suzuki in the PV segment, which has a focus on the growing SUV segment, a robust order book in the New Brezza and Grand Vitara, new launches in Baleno crossover and Jimny, and a strong marketing reach and distribution network.
In addition, Ashok Leyland is expected to sustain the CV up-cycle in FY24, owing to successful marketing efforts and the AVTR range. However, key risks include higher interest rates that could limit sales.
TVS Motor in the 2W space is well-positioned to take advantage of the focus on premium bikes and EV scooters, giving it an edge over its peers, as per the brokerage.
Eicher Motors has robust RE/VECV volumes, along with premium bikes that fit well with the trend towards premiumization in the 2W sector.
Finally, in the auto ancillary space, Uno Minda is expected to grow ahead of the industry, given its diversified product mix, EV orders, and exposure to airbag manufacturing.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
