Auto Q3 preview: Analysts expect fall in volumes in 2W and PVs, but better margins

In Q3FY23, analysts expect demand to be weak in the personal mobility space. (Photo by Taras Makarenko/Pexels)

The Street expects sequential earnings growth for the auto sector to be flattish in the quarter ended December, led by low sales volumes, particularly in the two-wheeler (2W) and passenger vehicle (PV) segments, which will only be slightly offset by a fall in raw material costs. The tractor and commercial vehicle (CV) segments, though, are expected to post strong numbers in the same quarter.

According to analysts at ICICI Securities, retail demand was strong across auto segments thanks to the festive season, harvesting season and year-end discounts but, in the 2W and PV segments, dealers were destocking and, therefore, wholesale volumes were low. But the positives worked in favour of tractor and CV volumes. The analysts expect profitability to improve by around 200 basis points (bps) quarter-on-quarter (QoQ) for tractor and CV companies, thanks to better volumes and lower input costs; and for margins to remain flattish QoQ in the personal mobility space.

Also read: Auto sector clears December hurdles, gears up for fast lane in Q4

Analysts at Choice Equity Broking, who see only a moderate QoQ increase in the topline of auto and auto-ancillary companies under their coverage, too expect CV segment’s topline growth to be better than PV and 2W segments’.

Analysts at Motilal Oswal Securities Ltd (MOSL) vary in the opinion, in that they think demand was intact across auto segments except in entry-level PVs. But volumes have fallen sequentially for PV and 2W companies under their coverage by 10 percent and 22 percent, respectively, going by their report. “M&HCV and Tractors are the only segments to witness QoQ improvement in volumes,” the analysts said in their India strategy report.

Analysts across brokerages are more optimistic about margins because of a fall in input costs.

ICICI Securities believes higher gross margin will help offset lower volumes in Q3FY23, and according to MOSL, margins are set to improve for the second quarter in a row with 40bps QoQ expansion.

“Except for BJAUT (Bajaj Auto) and HMCL (Hero MotoCorp), all other OEMs (original equipment manufacturers) should report margin expansion on YoY (year-on-year) and QoQ basis. 3QFY23 will be the first quarter to see benefits of lower commodity prices, which, along with benefits of favorable FX (foreign exchange), would drive gross margin expansion of 100bp YoY (+70bp QoQ),” wrote MOSL analysts.

Choice Equity Brokerage expects margins of both PV and 2W segment to benefit from lower raw material cost, and see PV having an additional benefit from a better product mix.

Discounts offered by some of the OEMs may dilute some of the raw material price fall benefits, they added.

On auto ancillaries, analysts at Choice Broking have a more optimistic view than those at Nirmal Bang. “Auto ancillary companies under our coverage are expected to perform better on the revenue growth front due to an increasing share of premium content in the vehicles and the acceleration of ICE (internal combustion engine) to EV (electric vehicle) transition,” stated a report from Choice Broking.

A report from Nirmal Bang, however, pointed to price hikes taken by some tyre companies that could affect the topline, though they added that margins may improve QoQ by 60bps “due to RM (raw material) cost moderation, price hikes and operating leverage benefits”.

Better days ahead

Analysts believe that things will change for the better from the next quarter onwards.

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In the fourth quarter of this fiscal, both margins and volumes are expected to do well, according to ICICI Securities.

A similar sentiment was expressed by analysts at Nirmal Bang. “Going ahead, we expect to see recovery in rural sentiments amid improving income levels, which should support 2W volume while PV demand will remain robust on the back of new product launches. The CV segment is expected to continue its strong growth trajectory, driven by replacement demand. However, we remain cautious about the outlook for exports due to concerns about economic slowdown and geopolitical issues confronting the US & the EU. Furthermore, softening commodity prices should further bode well for the entire industry,” they wrote.

MOSL’s analysts have revised three companies’ FY24 earnings estimates downwards, based on change in customer preferences in the domestic market, weakness in exports and on commodity price/FX changes. They lowered estimates for Eicher Motors (-5%), Exide Industries (-5%) and Bajaj Auto (-5%).

The analysts wrote that they prefer companies with higher visibility in demand recovery, strong competitive position, margin drivers and balance sheet strength.