OEMs to lead growth charge in auto space for Q2FY23 - Auto & Auto Ancillary Preview

What's Buzzing

We expect the auto space to report healthy results in Q2FY23 amid QoQ uptick in sales volume, stable to positive gross margins, operating leverage led expansion in EBITDA margins and consequent PAT growth. With the management commentary guiding RM benefits are expected to accrue from H2FY23, we expect gross margins to bottom out and marginally improve in the range of 20-50 bps QoQ for our coverage, given the magnitude of RM price decline (metals, plastics down ~15-20% QoQ). With operating leverage at play, EBITDA margins for the universe are seen expanding 60-90 bps QoQ with OEMs leading the growth charge in the auto space for Q2FY23. 

Context

On the volumes font, in the 2-W space, volumes at Hero MotoCorp for the quarter were at 14.3 lakh units, up 2.7% QoQ while the same in the premium segment i.e. Royal Enfield at Eicher Motors was at 2.1 lakh units, up 11% QoQ. For Bajaj Auto, total volumes for the quarter were up 23.3% QoQ at 11.5 lakh units amid improved supply chain dynamics. In the PV domain, total volumes at Maruti Suzuki came in healthy at 5.2 lakh units, up 10.6% QoQ while total automotive volumes at M&M were at 1.8 lakh units, up 17.1% QoQ. In the CV space, volumes at Ashok Leyland came in healthy at 45,295 units, up 14.2% QoQ with a stable product mix with M&HCV to LCV ratio at 61:39. In the tractor space, in the seasonally weak quarter, sales volumes at M&M were at 0.94 lakh units, down 21% QoQ. For Escorts, sales volumes were at 23,703 units (down 11.5% QoQ). 

Our Perspective

New launches in the SUV space, QoQ improvement in wholesale volumes amid improving supply chain dynamics, affordable launch in the premium 2-W space by Royal Enfield (Hunter 350 cc), continued decline in key raw material prices and pick up in electrification trend including ordering activity in the electric bus segment were key highlights for Q2FY23. Total industry volumes in Q2FY23 are expected to increase ~7% QoQ led by the robust performance in the PV and CV space, which grew >10% QoQ. In the auto OEM space (ex-Tata Motors), we expect sales to grow 12% QoQ with 90 bps expansion in EBITDA margins and consequent PAT growth seen at 39% QoQ. In the ancillary space, we expect sales to de-grow 1% QoQ with 60 bps expansion in EBITDA margins and consequent PAT remaining largely flat YoY. The muted show in the ancillary space was primarily driven by somewhat muted prospects in the export markets given the macro uncertainty. On an aggregate basis, we expect our coverage universe (ex-Tata Motors) to report 10% QoQ sales growth and 80 bps QoQ margin expansion to 11.8% with PAT expected to grow 33% QoQ. Key outliers for Q2FY23 are seen as Ashok Leyland, M&M and Maruti Suzuki. We remain positive on the auto space given the expectation of double digit volume growth in the near term coupled with benign commodity price outlook leading to a healthy margin recovery and consequent improved return ratios.