Auto sector in Q2 sees better profitability led by raw material savings and cost efficiency, 2HFY24 to be better

The automobile industry saw a significant year-on-year (YoY) growth of 112% (compared to expected growth of +87%), led by Mahindra & Mahindra (M&M), Maruti Suzuki, and Tata Motors.

Also read: M&M’s strong Q2 results get thumbs up from analysts; should you buy the stock?

“The quarter saw upgrades for FY24E, mainly to incorporate the benefits of improved gross margin and cost efficiencies, which ultimately supported overall profitability,” the brokerage said.

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The brokerage claims that while there was an inventory build for the Christmas period last year, which fell relatively earlier, car volumes in 2QFY24 were flat YoY. The strong growth in MHCVs, traction in SUV demand, and an early recovery in 2Ws were the main drivers of the positive performance.

Also Read: Bajaj Auto share price rallies 4% to hit 52-week high after strong Q2 results; Should you buy?

Thus, wholesale sales for 3W/PV/CV increased by around 11%/6%/4% YoY, while those for tractors/2Ws/LCVs decreased by 4%/3%/1% YoY. MHCV volume increased by around 15% year on year. Exports and domestic volume fell by 6% and 2%, respectively, in the second quarter. Price increases and volume growth drove a 15% YoY increase in total revenue for brokerage Auto Cruine (ex-JLR).

The benefits of foreign exchange, operating leverage, and a reduction in inflation in commodity costs were the main drivers of the 42% year-over-year EBITDA growth. The adjusted quarterly profit after taxes (PAT) increased by 59% year on year.

Going forward, based on festival volume growth, a stable macro outlook benefiting MHCV demand in particular, backlog execution in PVs, and a sustained recovery in 2W demand followed by an increase in exports, the brokerage expect 2HFY24 to outperform 1H. .

Also Read: Maruti Suzuki Q2 Results: Net profit jumps 80% YoY to ₹3,716.5 crore; The stock earnings rate is at an all-time high

Gross margin improved for the fifth quarter in a row, fully reflecting the benefits of raw material mitigation (RM):

The brokerage reported that gross margin for Auto OEMs (ex-TTMT) increased by around 420 basis points (bp) YoY and 220 bp QoQ to 28.7%, which now precisely reflects the benefits of easing RM costs. Although they admit that there is a slight increase in RM costs, most companies emphasized that this would not have a major impact on the cost. This resulted in EBITDA margin increasing by 240bp YoY/90bp QoQ to 12.3%, further supported by increased efficiencies and FX benefits.

“We believe that the full benefits of low RM costs have been demonstrated in 2QFY24 as initial trends in 3QFY24 show a slight increase in metal prices. However, we believe this should be partially offset by operating leverage and further cost control. For companies with global operations (particularly in the EU), inflationary pressures continue to ease with a decline in commodity prices as well as energy costs, and volume recovery benefits will be seen in the coming quarter,” the brokerage said.

Also Read: Tata Motors Q2 Results Highlights: Net profit at ₹3,764 crore, revenue at ₹1.05 lakh crore

Exports – Headwinds continue

According to the brokerage, exports continued to push in the second quarter of FY24, citing management comments. In 2Q, most companies reported a slow but steady recovery. Despite headwinds arising from the macroeconomic environment, demand is projected to gradually improve in 2HFY24, which will benefit overall utilization and profitability going forward.

Valuation and view

“We prefer 2W within the sector followed by CVs. We are already witnessing a reversal in demand, particularly in the 2W segment, which we believe has better growth potential compared to other segments over FY23-25E. On the other hand, we are cautious on the PV growth outlook due to a slowdown in demand and a high base. Tata Motors and Hero MotoCorp are our top original equipment manufacturer (OEM) picks. Among auto components stocks, we prefer Endurance Technologies and Craftsman Automation,” the brokerage said.

Also Read: Auto sector Q2 Results Preview: Cheaper input costs, higher realizations to drive revenue, margins

Disclaimer: The above opinions and recommendations are the opinions and recommendations of individual analysts, experts and brokerage firms, not of the Mint. We encourage investors to check with certified experts before making any investment decisions.

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Updated: 16 November 2023, 12:02 PM IST