PL Sector Report - Automobiles - Apr-Jun’23 Earnings Preview – Volumes grow; but margins to soften

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

Apr-Jun’23 Earnings Preview – Volumes grow; but margins to soften

Quick Pointers:

♦ EBITDA margin to be under pressure due to inferior mix and input cost inflation.

♦ 2Ws show strong growth QoQ; but inferior mix may lead to fall in margins.

In 1QFY24, auto industry witnessed overall low single digit increase in volumes (2.5%) led by domestic volume of 3W, 2W and PVs, while exports 2W continued to see a high double digit decline (c-35% for OEMs we track). Tractors and CV industry declined marginally by low single digits, on high base and pre-buying respectively. For our OEM coverage universe, we expect (1) aggregate revenue decline of -3% QoQ (incl JLR; -4% excl JLR) owing to fall in ASP due to inferior product mix and (2) EBITDA margin to contract ~90bps QoQ (incl JLR) led by input cost increase and inferior product mix, however, commodity costs have become favorable and should positively impact margins next quarter onwards, in our view.

The premium 2W segment (+250cc) in India has seen increase in competition with entry of multiple models from Harley Davidson and Triumph Motorcycle at very attractive price points. We see this disrupting the market for Royal Enfield who is market leader in the segment, and will need to move fast to maintain its dominance. We change out earnings estimates for FY24-25E for all the companies in the range of -5% (EIM IN) to 19% (TTMT IN). Nifty Auto index (+23%) has significantly outperformed the Nifty 50 (+8%) YTD. Our top picks are Maruti Suzuki and Ashok Leyland.

♦ 3W continues with strong growth; overall retail growth lower than wholesale; In 4QFY23, the PV industry grew by c9% YoY, we saw MM, Toyota and MSIL gaining market share while Honda, Renault and Kia lost their most market share. 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 of PVs. CV industry declined by c3% YoY, with TTMT losing market share while other listed OEMs gaining share. M&HCV segment continued to outperform led by strong end-user industry demand. Tractors industry was likely flattish YoY in 1QFY24. Strong divergence in the two-wheeler (2W) segment continued with domestic demand witnessing growth of c11% and exports market continues to see steep declines of c35% in 1QFY24. 3Ws continue to recover in the domestic market, while exports remain weak. Retail volumes across segments showed growth YoY, however, growth was lower than wholesales in the PV and 2W while outpaced in 3Ws.

♦ Revenue to decline by 4% QoQ (excl JLR) for our auto OEM coverage universe led by decline in commercial vehicle segment and domestic PVs while 2W volumes showed good growth. Strong growth seen for BJAUT (+16%) TVSL (+10%) and HMCL (+8%) while AL should see sharpest fall (-32%) QoQ.

♦ Aggregate EBITDA margin to fall ~60bps QoQ (excl JLR) led by improving inferior mix for a few players, increase in input price, operating de-leverage, and reversal of inventorisation benefit. We build in stable or decline in margin across OEMs, except for EIM and MM which will likely benefit from mix on the margin side.

♦ Commodity price sees deflation in the quarter; should move from 2Q: Major commodity price saw decline in prices during 1QFY24 sequentially. As the margins get impacted with a lag, we could see margin benefiting from this decline in commodity basket.

♦ Key Rating Changes We adjust our FY24-25E earnings in the range of -5% to +19% to factor in quarterly volumes, increase in competitive intensity, and slower than expected recovery in exports. Below are the key rating changes:-

♦ We maintain our ‘BUY’ rating on MSIL (TP: Rs 11,100; previous: Rs 10,300), AL (TP: Rs 215; previous: Rs 215), TTMT (TP: Rs 675; previous: Rs 605), MM (TP: Rs 1,685; previous: Rs 1,585) and BHFC (TP: Rs 955; previous: Rs 940).

♦ We downgrade to ‘ACCUMULATE’ from Buy on TVSL (TP: Rs 1,380; previous: Rs 1,300), HMCL (TP: Rs 3,460; previous: Rs 3,200) and ENDU (TP: Rs 1,745; previous: Rs 1,670) given recent run-up in valuations and EIM (TP: Rs 3,700; previous: Rs 4,030) due to increased competitive intensity in its segment.

♦ We downgrade to ‘REDUCE’ from Hold on BJAUT (TP Rs 4,450; previous: Rs 4,130), as we see recent run-up post Speed 400 Triumph model launch to have factored in excessive positivity, even after factoring in fast ramp-up of volumes for the model.

♦ We downgrade to ‘HOLD’ from Accumulate on CEAT (TP: Rs 2,330; previous: Rs 2,260) given recent sharp run-up in valuations.

♦ Key tailwinds and headwinds to watch out in FY24: Tailwinds: Stable pricing environment across segments, improving sentiment in the rural and urban markets, low base for some of the segments, Headwinds: Impact from increase in interest rates, impact on rains from El-Nino, rise in inflation, increase in competition, fall-out from global recession resulting in slowdown in growth in the Indian economy.

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