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Emkay Global Financial Services has released a preview research note on the auto and ancillaries sector in Q1. Emkay Global expects the auto sector ( their coverage companies excluding Tata Motors) to report 17% YoY revenue growth in Q1FY24, led by healthy growth across segments, barring muted growth in battery companies.

Two wheelers

The domestic 2-Wheeler industry’s volumes likely improved by ~10% YoY in Q1, primarily on account of continued and healthy demand from the urban/premium segment. While 2-wheeler exports remained weak on a YoY basis, sequential improvement was recorded for larger volume players. The overall revenue is expected to grow at 24%, 19% and 16% amid volume growth of 10%, 5% and 21% for Bajaj Auto, TVS Motors and Eicher Motor-Royal Enfield, respectively. The revenue growth for HMCL is expected at 6%, amid a volume decline of 3%. Continued price hikes would lend support to Authorised service providers on a sequential basis; for Bajaj Auto, Emkay Global expects a 7% QoQ drop in authorised service providers, given a lower share of 3-Wheelers during the quarter.

Passenger Vehicles

The domestic PV industry’s volumes likely grew by ~8% YoY in Q1 amid ramp-up in production and continuing interest in SUVs. The expectation is nearly 17% revenue growth for market leader Maruti Suzuki, backed by 6% higher volumes; M&M’s auto division is expected to post robust ~33% revenue growth (overall growth of 24%), driven by 21% higher volumes. On the other hand, Tata Motors’ PV division has witnessed 8% volume growth YoY. For Maruti Suzuki, the brokerage house expects continued margin improvement on a QoQ basis (despite 3% lower volumes) on account of ongoing improvement in the product mix (SUV share at ~30% in Q1FY24 vs. 24% in 4QFY23) and price hikes.

Commercial Vehicles

The domestic CV industry’s volumes declined by ~5% YoY; the sequential decline was placed much higher at ~23% due to usual seasonality and some pre-ponement of demand in Q4FY23 because of RDE/OBD2 norms coming into effect from Apr-23. Among their coverage universe, Emkay Global expects a revenue jump of 9% for Ashok Leyland (+4% volumes) and 16% for Eicher Motor-Volvo Eicher CV (+12% volumes); in Tata Motors, they expect an 8% revenue decline on ~14% lower volumes. Margins for the CV pack are likely to be weaker QoQ due to an adverse mix (lower MHCV sales) and lagged pass-through of steel price inflation seen in Q4FY23.

Tractors

The domestic tractor industry’s volumes fell by ~2% YoY on a high base and delayed monsoon in certain regions. Emkay Global expects a 11%/8% revenue growth for Escorts/M&M.

Tata Motors

Tata Motors is likely to register ~44% consolidated revenue growth, driven by strength in JLR (+70% YoY with 30% higher volumes due to improved production levels); Emkay Global expects consolidated EBITDA margin to drop by ~90bps QoQ to 11.2%, largely due to adverse mix and lower volumes in standalone (India CV) operations.

Ancillaries

Emkay Global expects healthy YoY revenue growth across ancillaries (ex-battery companies, BHFC), led by an uptick in production across PVs/2-Wheelers and outperformance due to higher content per vehicle. Among the pack, SAMIL and UNOMINDA are likely to stand out, with ~30% and ~16% growth in revenue, respectively.

Aggregate EBITDA

margin (excluding Tata Motors) should expand by ~40bps QoQ, on a better scale, price hikes and favorable currency movement. On a sequential basis, however, CV companies (and associated ancillaries) are expected to post a decline because of lack of operating leverage.

Sector view:

Emkay Global continue to prefer 2-Wheelers, with Eicher Motors and Hero Moto Corp as their top buys; they are also positive on MSIL. Among ancillaries, positive on Motherson Sumi and Samvardhana Motherson. Key downside risks: Deterioration in domestic/global macros; negative surprises on component supplies; and adverse commodity/currency movement.

COMPANY-SPECIFIC / REGULATORY DISCLOSURES BY EMKAY GLOBAL FINANCIAL SERVICES
LIMITED (EGFSL): Disclosures by Emkay Global Financial Services Limited (Research Entity) and its Research Analyst under SEBI (Research Analyst) Regulations, 2014 with reference to the subject company(s) covered in this report-: 1. EGFSL, its subsidiaries and/or other affiliates and Research Analyst or his/her associate/relative’s may have Financial Interest/proprietary positions in the securities recommended in this report as of July 10, 2023 2. EGFSL, and/or Research Analyst does not market make in equity securities of the issuer(s) or company(ies) mentioned in this Report Disclosure of previous investment recommendation produced: 3. EGFSL may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by EGFSL in the preceding 12 months. 4. EGFSL, its subsidiaries and/or other affiliates and Research Analyst or his/her relative’s may have material conflict of interest in the securities recommended in this report as of July 10, 2023 5. EGFSL, its affiliates and Research Analyst or his/her associate/relative’s may have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the July 10, 2023 6. EGFSL or its associates may have managed or co- managed public offering of securities for the subject company in the past twelve months. 7. EGFSL, its affiliates and Research Analyst or his/her associate may have received compensation in whatever form including compensation for investment banking or merchant banking or brokerage services or for products or services other than investment banking or merchant banking or brokerage services from securities recommended in this report (subject company) in the past 12 months. 8. EGFSL, its affiliates and/or and Research Analyst or his/her associate may have received any compensation or other benefits from the subject company or third party in connection with this research report.

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