Gross margin to plateau in Q4FY23, ancillary set to outperform! - Auto Preview

What's Buzzing 

With majority of raw material decline benefits already accrued by OEMs in the past and tyre space set to witness already guided gross margin expansion in Q4FY23 amid a steady rise in key raw material prices, we expect gross margins to largely peak out for our universe in the current quarter (Q4FY23). We expect our coverage universe [ex-Tata Motors (Tamo)] to report 7% QoQ sales growth & flat QoQ margins at 12.7% with PAT expected to grow 9% QoQ. We expect the auto ancillary space to outperform the OEM pack (led by margin recovery particularly by tyre players). 

Context 

On the volume font, in the 2-W space, volumes at industry leader Hero MotoCorp for the quarter was at 12.7 lakh units, up 2.5% QoQ while the same in the premium segment, Royal Enfield, at Eicher Motors was at 2.2 lakh units, down 1.3% QoQ. In the PV domain, total volumes at Maruti Suzuki came in at 5.1 lakh units, up 10.5% QoQ. In the CV space, volumes at Ashok Leyland came in healthy at ~60,000 units, up 25.5% QoQ with favourable product mix with M&HCV to LCV ratio at 68:32. In the tractor space, it was a seasonally weak quarter, with sales volumes declining double digit QoQ at both listed players. 

Our Perspective 

New product launches as well as technical capabilities showcased in the alternate fuel domain during Auto Expo 2023, robust wholesale volume prints for March 2023 thereby ending the year with ~20% volume growth for the industry in FY23, resurging raw material prices from their lows, fresh price hike announced by OEMs in response to transition to Bs-VI stage 2 norms (starting April 2023) and resurfaced chip supply issues were some key highlights for Q4FY23. Total industry volumes in Q4FY23 are expected to grow ~5% QoQ primarily led by outperformance in the CV and PV space. In the auto OEM space (ex-Tamo), we expect sales to grow 7% QoQ with ~20 bps decline in EBITDA margins at 12.1% with consequent PAT growth seen at 7% QoQ. In the ancillary space, we expect sales to grow 4% QoQ with ~120 bps expansion in EBITDA margins and consequent PAT growing 31% QoQ. Key outliers for Q4FY23 are seen as Ashok Leyland, Tata Motors in OEM space & Apollo Tyres in the ancillary pack. Going forward, we expect auto volume growth to taper in FY24E, albeit on a high base. We, however, continue to remain positive on the PV (underpenetrated category domestically) and CV domain (beneficiary of robust government spending on infrastructure)