Auto sector Q2 preview | Expect strong YoY growth on low base; outlook encouraging

The strong growth in sales of auto companies in the last few months is likely to improve growth in revenue during the September quarter even though it will come on a relatively lower base.

Analysts expect auto makers’ revenue to grow in low double digit sequentially for the quarter ending September 30 and in the vicinity of 40 percent year on year (YoY).

In top gear

“We expect automotive OEM (original equipment manufacturer) revenues to increase by 11 percent QoQ (quarter on quarter), mainly on account of a double-digit increase in passenger vehicles and two-wheeler segment volumes, led by improvement in chip availability leading to higher production and channel filling before the onset of the festive season,” analysts at Kotak Securities said in a note.

The broker expects EBITDA margin (except for Tata Motors) to improve by 130 basis points QoQ, led by operating leverage benefits and raw material tailwinds in Q2FY23.

EBITDA is earnings before interest, tax, depreciation and amortisation and is a key measure of profitability for companies

Production during the September quarter improved sequentially for two-wheelers, with channel filling for the festive season, even commercial vehicle production improved marginally. Passenger vehicle volumes also improved, led by softening of chip shortage concern.

“Q2FY23E revenues for Elara OEM universe (ex-Tata Motors) are likely to improve 39 percent YoY (+11 percent QoQ), while those for ancillaries to grow +16 percent YoY (-3 percent QoQ),” analysts at Elara Capital said in a note.

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They also added that decline in raw material cost, coupled with price hikes, would aid Q2FY23 margin expansion. Improving operating leverage with volume revival and optimisation of product mix may aid margin further, they said.

The volume data for September has been encouraging. Many automakers, including Maruti Suzuki, Royal Enfield and Tata Motors, reported strong growth–as much as 100 percent year on year. The strong showing was supported by early commencement of the festival season, which aided demand for vehicles.

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As per Motilal Oswal calculations, volumes in Q2FY23 recovered across segments on a low base of Q2FY22 aided by an improvement in semiconductor supplies.

Wholesale volumes for passenger vehicles grew 25 percent YoY and 5 percent QoQ, commercial vehicles grew 37 percent YoY and 7 percent QoQ, two-wheelers grew 5 percent YoY and 12.5 percent QoQ and tractors grew 7 percent YoY but fell 15 percent QoQ.

Export worries

The brokerage continues to see improvement in volume. It expects a 12 percent, 22 percent, 7 percent, 14 percent, 19 percent and 26 percent volume CAGR (FY22-24) for two-wheelers, passenger vehicles, tractors, three-wheelers, light commercial vehicles, and medium and heavy commercial vehicles, respectively.

One concern that analysts outline for the auto industry is dwindling exports. Exports have been under pressure for OEMs as well as auto component suppliers due to various frictions in the global trade.

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“After operating through several headwinds in the last three-to-four years, some of these headwinds are turning into tailwinds,” Motilal Oswal said.

“While demand recovery is expected to sustain on a low base, commodity prices have started to moderate, with benefits expected to accrue from 3QFY23. Increase in interest and weakening global macros can be an emerging concern for demand.”

Axis Capital agrees with the assessment.

The long-term outlook for the auto industry remains positive as demand drivers are intact and channel filing was seen before the onset of festival season.

Demand momentum in the commercial vehicle segment is likely to sustain and Axis Capital expects the cycle to maintain its momentum, driven by the pickup in economic activities, the government’s focus on infrastructure and the opening of educational institutes.

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