Auto sector Q2 preview: Revenue, profitability to jump on high prices, margin boost

For passenger vehicles, volumes are expected to rise over 7 percent from the same quarter last year (Representative image)

Automobile companies are likely to report robust revenue growth and improved profitability in Q2 FY24 earnings, helped by higher selling prices and lower raw material costs. However, a fall in sales volume is likely to limit the revenue upside.

"We expect 2QFY24 to show strong YoY revenue and margin improvement, aided by strong tailwinds from realisation, operating leverage for few OEMs and benign commodity prices," said Prabhudas Lilladher in a note.

Nomura expects a cumulative revenue increase of 21 percent year-on-year, and EBITDA rise of 40 percent year-on-year for the OEMs in its coverage, excluding Jaguar Land Rover.

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Healthy margins to boost profit, even as volumes disappoint
The automobile sector’s EBITDA margins are set to increase in the fiscal second quarter, driven by lower raw material costs, favourable foreign exchange and operating leverage benefits, expanding for the sixth quarter on a year-on-year basis.

Even while margins are expected to grow, automobile sales volumes are slated to fall largely because of a dip in 2-wheeler and tractor sales in the quarter.

From a demand standpoint, brokerages anticipate almost a 3 percent YoY drop in two-wheeler volume in 2QFY24, according to average estimates of three broking firms. “The segment, however, continues to see a gradual recovery in the export market, which is expected to grow by about 3.5 percent,” Motilal Oswal said in its Q2 auto preview report.

Also read: Record PV, 3W retail sales aid overall auto sector to post 9% growth in April-September: FADA

SUV boost to passenger vehicles volumes: For passenger vehicles, volumes are expected to rise over 7 percent from the same quarter last year, driven by robust demand in the sports utility vehicle (SUV) segment. "OEMs or original equipment manufacturers should continue to hold a strong orderbook in the SUV segment which should help in cushioning the slowdown in cars," analysts at Prabhudas Lilladher said in a report. Further, global brokerage firm Nomura expects impressive festive season sales supported by a healthier inventory of SUVs, in the ongoing quarter.

Also read: JLR reports best-ever H1 performance; sales grow two-fold to 2,356 units

Commercial vehicles grow: The commercial vehicle space is expected to register a growth of about 6 percent on a yearly basis due to better demand in underlying industries and healthy fleet utilisation levels. Prabhudas Lilladher is of the view that Tata Motors and Maruti would potentially lose market share while Ashok Leyland and VECV (Volvo and Eicher Motors JV) would gain share. The medium and heavy commercial vehicles segment continued to outperform led by strong end-user industry demand.

Rocky Q2 for tractors: For the July-September quarter, analysts suggest that tractor sales will decline about 3.3 percent from last year. The dip is attributed to the erratic monsoon across key regions and last year's high base. InCred Equities states that "the tractor segment’s
growth is at risk as prolonged high interest rates and rising crude oil prices pose a threat to automobile demand post the festive season.

What are the tailwinds and headwinds for the automobile sector?

Tailwinds: The approaching festive season, price stability across various segments, enhanced consumer sentiment in both rural and urban areas leading to increased demand for discretionary products, and a favourable low base effect in certain segments.

Headwinds: Impact from an increase in interest rates, rise in inflation, increase in competition, the fall-out from weak global macro resulting in a slowdown in growth in the Indian economy.

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