Auto sector Q1 preview: EBITDA margins set to jump on price hikes, fall in input costs

The 2-wheeler (2W) industry is forecasted to grow at 10 percent on a yearly basis in Q1 and will outperform other segments for the first time in many quarters, albeit on a low base.

Automobile companies are expected to witness a jump in profit margins in the 1QFY24 on the back of price hikes and steady input costs. "Sustained decline in the prices of commodities like aluminium, copper, steel and precious metals on a quarter-on-quarter (QoQ) basis will continue to benefit gross margin expansion, as seen in recent quarters," InCred Equities said in results preview for the sector.

Analysts tracking the sector suggest that earnings before interest, tax, depreciation and amortisation (EBITDA) will increase by about 33 percent. A shift in focus towards premiumisation will also accelerate margins in the upcoming quarters.

Let's look at the segment-wise growth estimates for the quarter.

The 2-wheeler (2W) industry is forecasted to grow at 10 percent on a yearly basis in Q1 and will outperform other segments for the first time in many quarters, albeit on a low base. While domestic 2W volumes may increase 11 percent year on year (YoY), exports are expected to slump 31 percent YoY. Brokerages predict a 21 percent increase in earnings growth for the industry.

The positive outlook reflects higher sales of 125cc+ motorcycles in the first quarter, and the mix will play out better for players focused on this segment. Hence, operating leverage benefits and an improved mix are likely to drive margin expansion. "We expect all four 2W OEMs to post very healthy earnings growth in Q1," HDFC Securities said in its earnings preview. The strong industry growth in motorcycles has also been aided by a good marriage season in Q1.

On a QoQ basis, the commercial vehicle (CV) segment players may deliver weak revenue and lower EBITDA due to seasonality and pre-buying in the previous quarter. Brokerage firm ICICI Securities predicts that with discounts under control along with steady raw material prices, the EBITDA margin for CV players would fall to 8 percent as against 11 percent in Q4FY23 led by lower scale. This means that the decline in margin is likely to be influenced by a decrease in the scale of operations, which could impact revenue for these companies.

The utility vehicle (UV) vertical is expected to grow at 17.6 percent in Q1. HDFC also forecasts that the segment will contribute about 55 percent to the total passenger vehicle (PV) sales in the quarter. The PV industry has seen a 9 percent YoY growth in volumes in Q1 with the mix continuing to shift towards UVs.

PV OEMs should continue to see an improved mix in Q1 and majors such as Tata Motors and Maruti Suzuki are set to perform well in the segment.

TVS Motors: The company's volume growth is expected at roughly 7 percent. Average selling prices, or ASPs, will also increase due to higher EV volumes. In terms of market share, its share will largely remain stable in scooters at about 25 percent (including EV) while it is expected that the company will almost see a 450 basis points (bps) improvement in motorcycle market share to 11 percent. "Overall, we expect TVS margins to improve 50bps YoY to 10.5 percent. Also, we expect TVS to post 46 percent YoY growth in profit after tax," HDFC said.

Maruti Suzuki: India's leading automobile manufacturer is poised to outperform in UVs for the second consecutive quarter. Its UV mix is projected to improve 25 percent of total volumes from 20 percent in Q4 and from 17 percent in Q1FY23.

Bajaj Auto: Analysts at HDFC are of the view that the 2-wheeler major should significantly outperform the domestic motorcycle industry with 69 percent YoY growth, largely due to a weak base which was impacted by chip shortages last year. "It is expected that the company revenues will increase 31 percent YoY, benefitting from a favourable product mix and higher ASPs during the quarter and a 10 percent increase in overall volumes," Nomura Holdings said in its results preview.

Tata Motors: The country's largest EV player's growth will be driven by volume recovery in its British arm Jaguar and Land Rover business. JLR has brought down its break-even production levels by 50 percent in FY23 and plans to stop vehicle assembly at the Castle Bromwich plant as Jaguar moves to a new all-electric platform. Analysts believe this decision will improve the company's utilisation levels. It has already reduced the number of platforms to seven from nine and is set to bring it to three, once the EV strategy is executed.