With gross margin expansion ruling Q3FY22, operating leverage gains seen benefiting auto space going forward!

What's Buzzing: 

Quarterly results in the auto space were largely ahead of our estimates with gross margin recovery taking centre stage as most of the players benefitted from raw material price decline. Our coverage companies reported a gross margin expansion broadly in the range of 50-300 bps on a QoQ basis with auto OEMs largely outperforming the auto ancillary space due to better economies of scale.  

Context: 

Ex-Tata Motors, I-direct auto and ancillary coverage universe revenues were down 1% QoQ vs. our estimates of ~2.8% QoQ decline with EBITDA margins on a blended basis at 12.7%, largely in line with our estimates. PAT de-growth was lower at 2% QoQ vs. estimated de-growth of 4.1%. Tata Motors outperformed big time with the company reporting positive PAT after seven quarters at ~Rs 3,000 crore, much ahead of our estimates of loss of ~Rs 1,000 crore, thereby lifting the overall sectoral earnings for Q3FY23. 

Our perspective: 

In terms of overall volumes during the quarter, M&HCV domain led the auto space with QoQ growth whereas rest of the segments saw sequential decline owning to year end phenomena. Overall management commentary with respect to demand particularly in PV & CV space remained strong with double digit growth expected for FY24E, however 2W & export outlook remained cautiously optimistic amidst rising inflationary scenario globally & high cost of ownership effecting entry level motorcycle space. During analyst interactions, most of the OEMs guided about RM related price hike being already in place with further price action expected in Q4FY23 in response to upcoming regulatory norms (BS-VI stage2). We continue to hold our positive stance on auto space given the expectation of double digit volume growth particularly in the PV & CV space, pending orderbook at the PV OEM’s  (~7 lakh units at the industry level) and CV cyclical recovery gaining further acceleration amid government’s thrust on infrastructure development with capex outlay for FY24E pegged at ₹10 lakh crore (up 33% YoY) at 3.3% of GDP.