Q3 marks inflection point for margin recovery in auto space - Auto & Auto Ancillary Preview

What's Buzzing 

Quarterly results in the auto space are expected to be healthy in Q3FY23 with margin recovery to take centre stage as most players are expected to benefit from raw material price decline. To put this into perspective, key raw materials like steel, aluminium and rubber are down in the range of 15-20% over the past six months while plastics are down ~50% over the past six months. Even after factoring in the quarterly lag, we expect OEMs to largely report gross margin expansion of ~150 bps on a QoQ basis while in the tyre space for players like Apollo Tyres we expect gross margin expansion to be ~250 bps QoQ. With gross margin expansion at play, EBITDA margins for the universe [ex-Tata Motors (TAMO)] are seen expanding ~110 bps QoQ with ancillary players leading the growth charge in the auto space for Q3FY23. 

Context 

On the volume front, in the 2-W space, volumes at industry leader Hero MotoCorp for the quarter were at 12.4 lakh units, down 13.2% QoQ. The same in the premium segment i.e. Royal Enfield at Eicher Motors was at 2.2 lakh units, up 6.6% QoQ. For Bajaj Auto, total volumes for the quarter were down 14.6% QoQ at 9.8 lakh units amid muted domestic sales. In the PV domain, total volumes at Maruti Suzuki came in at 4.7 lakh units, down 10% QoQ while total automotive volumes at M&M were at 1.76 lakh units, down 2% QoQ. In the CV space, volumes at Ashok Leyland came in healthy at 47,562 units, up 5% QoQ with a favourable product mix with M&HCV to LCV ratio at 65:35. In the tractor space, in the seasonally strong quarter, sales volumes at M&M were at 1.05 lakh units, up 13.1% QoQ while the same for Escorts was at 28,025 units, up 18.2% QoQ. 

Our Perspective 

Robust order book across PV OEMs, strong festive led retails across segments, inventory de-stocking amid calendar year change and continued correction in commodity prices were some key highlights for Q3FY23. Total industry volumes in Q3FY23 are expected to decline ~10% QoQ primarily led by the muted performance in the 2-W & PV space. In the auto OEM space (ex-TAMO), we expect sales to de-grow 3% QoQ with ~100 bps expansion in EBITDA margins and consequent PAT de-growth seen at 4% QoQ. In the ancillary space, we expect sales to de-grow 2% QoQ with ~120 bps expansion in EBITDA margins and consequent PAT de-growing 2% QoQ. The muted topline show is expected to be primarily driven by muted volumes in the domestic space (down ~10% QoQ) and macro uncertainty in key export markets. On an aggregate basis, we expect our coverage universe (ex-TAMO) to report 3% QoQ sales de-growth and ~110 bps QoQ margin expansion to 12.9% with PAT expected to de-grow 4% QoQ (impacted by high other income in base quarter). Ashok Leyland, M&M and Apollo Tyres are seen as key outliers for Q3FY23 tracking healthy volumes amid improved product mix, sharp uptick in margin profile and benefitting from both RM price decline as well as operating leverage at play.