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Lower than anticipated margins, MTM losses drag performance in Q1FY23 amidst optimistic H2FY23 for the Auto and Auto ancillary sector

ICICI Securities 09 Sep 2022

- Q1FY23 turned out to be a steady quarter for the automobile space with price action preceding the improvement in financials given the correction in key commodity prices viz. metals, crude and crude derivatives during the fag end of the quarter. With a revival in economic activity domestically, easing supply chain issues and marriage season during the quarter, total industry volumes in Q1FY23 were up 6% QoQ led by healthy 11% QoQ growth in the 2-W space. Topline performance for our universe came in ahead of estimates tracking commodity led calibrated price hikes taken by OEMs and ancillary players. Margin performance, however, came in muted tracking lower than anticipated margin recovery in the OEM space (10.4% vs. our estimates of 11.8%) while ancillaries performed on the expected lines (margins at 14.3% in Q1FY23 vs. estimates of 14.4%). Ex-Tata Motors, I-direct auto and ancillary coverage universe revenues were up 5% QoQ vs. our estimates of ~1.5% QoQ growth with EBITDA margins on a blended basis at 11% vs. our estimates of 12.2%. PAT growth again came in lower than estimates at 23.9% QoQ decline vs. estimated de-growth of 9.7% on account of lower-than-expected margins on the OEM front & MTM loss on investment book due to rise in yields 

- In the auto OEM space, MSIL surprised negatively on the margins front wherein gross margins declined 105 bps QoQ, further aggravated by negative operating leverage with consequent margins at 7.2% vs. our estimates of 9.2%. The management guided for strong order book & healthy response towards new launches in the UV space. Tata Motors’ Q1FY23 results were also muted, especially on the margin front driven by subdued performance at JLR with only silver lining being healthy performance in Indian operations. The management, however, remained optimistic on future performance with healthy wholesales guidance for coming quarter amid strong order book. For M&M, Q1FY23 results were steady with company witnessing QoQ expansion in margins both on automotive and farm equipment front but the key takeaway was large pending order book and >1 lakh booking for its newly launched Scorpio N. In the recent past, M&M also unveiled its five Concept EVs ready to be launched from 2024 onwards. OEMs are witnessing gradual improvement in supply chain and are optimistic about demand scenario 

- In the 2-W space, volume recovery and margins came in healthy. Eicher Motors led the 2-W OEM pack with key positive surprise being 24.5% margin up 75 bps QoQ. Hero MotoCorp, on the other hand, led the 2-W space with QoQ double-digit volume growth, with 2-W sales volume for the quarter at 13.9 lakh units, up 16.9% QoQ. The key negative was 3.3% sequential decline in ASPs at | 60,370/units largely due to lower spares (~12% of total revenue). Bajaj Auto reported a steady performance in Q1FY23 with EBITDA margins coming in at 16.2% (down 92 bps QoQ). Surprise was in rise in ASP, which were up 5.2% QoQ at | 83,210 amid higher share of export & improved product mix 

- In the tyre space, Apollo Tyres outperformed its peers in terms of stable gross margin QoQ with EBITDA margins at 11.6% up 40 bps QoQ. EBITDA margins on a standalone basis were at 9.7% (up 30 bps QoQ). Management commentary about capex remained confined amid present focus on sweating assets to achieve double-digit return ratio. Balkrishna Industries reported muted numbers for the quarter with lowest ever EBITDA margins at 17.2%, down 380 bps QoQ amid gross margin decline by 150 bps QoQ, further aggravated by higher other expenses which was up 206 bps QoQ. Key positive was management commentary with respect to annual tonnage guidance which remained unchanged and long term EBITDA margin guidance of 28-30% 

Disclaimer: ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is a Member of National Stock Exchange of India Ltd (Member Code :07730), BSE Ltd (Member Code :103) and Member of Multi Commodity Exchange of India Ltd. (Member Code: 56250) and having SEBI registration no. INZ000183631. I-Sec is a SEBI registered with SEBI as a Research Analyst vide registration no. INH000000990.  Name of the Compliance officer (broking): Ms. Mamta Shetty, Contact number: 022-40701022, E-mail address: complianceofficer@icicisecurities.com. Investments in securities markets are subject to market risks, read all the related documents carefully before investing. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The non-broking products / services like Research, etc. are not exchange traded products / services and all disputes with respect to such activities would not have access to Exchange investor redressal or Arbitration mechanism. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investors should consult their financial advisers whether the product is suitable for them before taking any decision. The contents herein mentioned are solely for informational and educational purpose. 

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