The auto sector is likely to report steady numbers for its June quarter (Q1FY23) earnings on the back of demand recovery and improvement in semiconductor chip supply. However, the quarter is likely to see some impact of cost inflation, but relief in the sector is expected from the second quarter (Q2FY23) onwards.
According to domestic brokerage house Motilal Oswal, the volumes in Q1FY23 recovered across segments due low base in the same quarter last year, supported by some improvement in the supply of semiconductors.
Demand momentum was sustained in passenger vehicles (PVs) and commercial vehicles (CVs), while two-wheelers (2Ws) and tractors witnessed some signs of recovery, it added.
"The wholesale volumes, in the June quarter, for PVs grew 22 percent YoY (-12 percent QoQ), CVs grew over 105 percent YoY (-10 percent QoQ), 2Ws grew 25 percent YoY (flat QoQ) and tractors grew 16 percent YoY (+49 percent QoQ)," the report informed.
It said that the 2Ws and tractors have witnessed QoQ improvement in volumes as OEMs were focused on inventory correction in Q4FY22. On the other hand, medium and heavy commercial vehicles (M&HCV) volumes were relatively strong for a seasonally weak quarter, added MOSL.
The auto index has outperformed benchmarks in recent times. In the June quarter, the auto index advanced over 14 percent as against a 7 percent fall in Nifty.
EBITDA
According to the report, after the last three-quarters of YoY decline in EBITDA margins, MOSL estimates margins to improve on a YoY basis by 140 bp (-90bp QoQ), driven by operating leverage, despite the increase in raw material cost. Except for Hero Moto and M&M, all other OEMs are likely to report QoQ erosion in margins, MOSL forecasts.
Q1FY23 will see an increase in commodity cost on account of steel prices and crude derivatives, diluted by some softening in other commodities as well price hikes taken by the OEMs, it added.
Headwinds and tailwinds
"After operating in the head-winded environment for the last three-four years, we are witnessing signs of some emerging tailwinds. While demand recovery is expected to sustain on a low base, commodity prices have started to moderate, though the benefit might come with a lag. Although fuel prices have moderated from the peak levels, an increase in interest rates could have some impact on demand," said the brokerage.
It expects 2W, PV and Tractor volumes to register 9.6 percent, 13.5 percent and 7 percent CAGRs, respectively over FY22-25E. Meanwhile, 3Ws, LCVs, and M&HCVs are expected to register 10 percent, 17 percent and 21 percent growth respectively, predicts MOSL.
Valuation
MOSL revised its FY23E EPS estimates for select companies for it to reflect a) commodity price/ forex changes, b) weakness in EU markets, and c) an increase in interest rates.
It lowered FY23 estimates for Tata Motors by 12 percent, Ceat and Apollo Tyres by 9 percent, and Endurance Tech by 6 percent. However, it raised its estimates for select 2W firms - Hero Moto by 10 percent, TVS Motor by 7 percent, and M&M/Eicher Motors by 5 percent.
MOSL also noted that it prefers companies with higher visibility in terms of demand recovery, a strong competitive positioning, margin drivers, and a strong balance sheet. Maruti Suzuki and Ashok Leyland are its top OEM picks. While among auto component stocks, it likes Motherson Sumi and TI India.
