PL Sector Report: Automobiles - Jul-Sep’23 Earnings Preview – Higher realisation to drive strong performance

Automobiles - Himanshu Singh - Research Analyst, Prabhudas Lilladher Pvt Ltd.

Jul-Sep’23 Earnings Preview – Higher realisation to drive strong performance

Quick Pointers:

• Sharp increase in ASP to aid revenue and margins, along with benign RM costs
• EBITDA margins should improve YoY and QoQ

We expect 2QFY24 to show strong YoY revenue and margin improvement, aided by strong tailwinds from realization, operating leverage for few OEMs and benign commodity prices. In 2QFY24, auto industry witnessed overall flattish volumes -1.1% on back of decline in 2Ws and Tractors. For our OEM coverage universe, we expect (1) aggregate revenue to grow by +26% YoY (incl JLR; +17% excl JLR) owing to sharp rise in ASP from price hikes, higher volume and better mix and (2) EBITDA margin to expand ~320bps YoY (incl JLR) led by lower commodity cost and superior product mix. Commodity costs continue to remain benign which should continue to aid margins.

Festive season is the next major catalyst for the automobile industry, while the expectations are high and initial trends for regional festive periods have shown positive momentum, a lot depends on the one-month festive period which starts from mid-October. OEMs have built inventory in anticipation of strong growth and higher retails would be key to avoid large inventory backlog post the festive season. We introduce FY26E for our coverage universe, change our earnings estimates for FY24-25E for all the companies in the range of -5% to +6%. Our top picks are Maruti Suzuki, Tata Motors and Ashok Leyland.

• Volume performance remains uneven; 3W, PV and CV show growth; In 2QFY24, the PV industry grew by ~5% YoY, we saw MM gaining market share of ~165bps while Tata Motors saw a decline in market share of ~110bps. Growth in the PV segment was led by SUV segment. OEMs continue to hold strong orderbook in the SUV segment which should help in cushioning slowdown in cars. CV industry grew by ~7% YoY, with Tata Motors and Maruti losing market share while Ashok Leyland and VECV gained share. M&HCV segment continued to outperform led by strong end-user industry demand. Tractors industry saw a decline in 2QFY24 with domestic tractors sales dropping by (2.7)% YoY and (21.7)% QoQ. 2W industry saw a de-growth of (3.7)% YoY on back of lower exports and a delayed festive season. 2W export demand increased by ~12% QoQ as fall has largely stabilized. 3Ws continue to show strong growth in the domestic market YoY, while exports remain weak.
• Revenue to increase by 17% YoY (excl JLR) for our auto OEM coverage universe led by increase in PVs and CV, while export focused and lower CC focused 2W OEMs showed lower growth. Strong growth seen for MSIL (+23%), MM (+21%) and AL (+18%), double digit growth for TVSL, TTMT, EIM while BJAUT and HMCL should see mid-single digit growth YoY. Amongst the Ancs, we see double digit growth for BHFC, EXID, ENDU while single digit for CEAT.
• Aggregate EBITDA margin to grow by ~200bps YoY (excl JLR) for OEMs led by improving mix, operating leverage, lower commodity prices. We build in higher margin across OEMs YoY in the range of 100bps-400bps and 60bp to 590bps for Acns.
• Commodity price were largely stable or declined in 2Q sequentially: Major commodity prices were flattish or showed decline during 2QFY24 sequentially. Base metals declined the most with Nickle dropping by (9.2)% and Zinc by (5.1)% QoQ, while Steel and Iron were flattish QoQ. The outlook on impact from commodity prices remains benign for 3Q.
• Key Rating & TP Changes We introduce FY26E, roll-forward our TP to Sep-25 and adjust our FY24-25E earnings in the range of -5% to +6% to factor in quarterly volumes, increase in competitive intensity, and lower than expected volumes in some segments. Below are the key TP and rating changes: -
• We maintain our ‘BUY’ rating on MSIL (TP: Rs 11,500; previous: Rs 11,100), AL (TP: Rs 220; previous: Rs 225), TTMT (TP: Rs 760; previous: Rs 760), MM (TP: Rs 1,775; previous: Rs 1,760) and BHFC (TP: Rs 1,170; previous: Rs 1070).
• We maintain our ‘ACCUMULATE’ rating on EIM (TP: Rs 3,729; previous: Rs 3,520), TVSL (TP: Rs 1,560; previous: Rs 1,400), HMCL (TP: Rs 3,575; previous: Rs 3,535), EXID (TP: Rs 295; previous Rs. 295) and ENDU (TP: Rs 1,820; previous: Rs 1,725).
• We upgrade to ‘Accumulate’ from Hold on CEAT (TP: Rs 2,450; previous: Rs 2,430) given recent correction in the stock.
• We maintain ‘REDUCE’ on BJAUT (TP Rs 4,750; previous: Rs 4,575)
• Key tailwinds and headwinds to watch out in FY24: Tailwinds: Upcoming festive season, stable pricing environment across segments, improving sentiment in the rural and urban markets translating to demand for discretionary products, low base for some of the segments, Headwinds: Impact from increase in interest rates, rise in inflation, increase in competition, fall-out from weak global macro resulting in slowdown in growth in the Indian economy.PL Technical Research