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Q3 review: Strong quarter; good times likely to continue

* Aggregate revenue growth of 18% yoy, excluding TTMT, was broadly in line with the estimate in Q3FY21. OEMs posted higher realizations across segments. Volume growth was seen in Tractors, PVs, 2Ws and Exports. Ancillaries also reflected similar trends with robust growth across most categories.

* The positive highlight was EBITDA margin expansion of 300bps yoy, above estimates due to better scale and cost savings. A notable beat was reported by TTMT, APTY, BHFC, ESC, MSS and BJAUT. Near-term margin pressure is expected due to higher commodity costs, which would be partially offset by price increases, in our view.

* Management gave a positive outlook on volumes -- improvement in the coming quarters to be driven by a pick-up in business/economic activity, continuing rural demand, low interest rates and improving finance availability. Moreover, wholesales growth should be aided by a favorable base in the next three quarters.

* The Auto sector remains a key beneficiary of the post-Covid economic recovery and low interest rates. Among OEMs, our top picks are TTMT (TP: Rs355), AL (TP: Rs155), MSIL (TP: Rs9,000) and EIM (TP: Rs3,300). Among Ancillaries, we like BHFC (TP: Rs760) and APTY (TP: Rs306).

EBITDA margin expands on better scale and cost savings: Revenue growth for companies under our coverage, excluding TTMT, was in line with the estimate at 18% yoy. Revenue improved for most OEMs and ancillaries due to better volumes and realizations. Industry volume trends have been encouraging, with double-digit growth in Tractors, PVs and 2Ws, while there was a marginal decline of 1% in CVs. Exports also witnessed positive growth across most segments. Aggregate EBITDA margin expanded by 300bps yoy, above estimates due to better scale and cost savings in marketing, logistics and other variable/fixed expenses. A notable beat was reported by APTY, BHFC, ESC, MSS and BJAUT. Meanwhile, TTMT reported better-than-expected OPM with positive FCFs, led by JLR and standalone operations.

Positive volume outlook: Management commentary was positive on volume expectations, owing to continuing rural demand, gradual pick-up in urban demand, low interest rates and improving finance availability. Near-term margin pressure is expected due to higher commodity costs, which would be partially offset by price increases.

Top picks: Recent months have shown many signs that point to a cyclical upturn in volumes across segments. Among OEMs, our top picks are TTMT (TP: Rs355), AL (TP: Rs155), MSIL (TP: Rs9,000) and EIM (TP: Rs3,300). Among Ancillaries, we like BHFC (TP: Rs760) and APTY (TP: Rs306).

Key downside risks to our calls and estimates include delays in economic recovery, rising competitive intensity and adverse movement in currency/commodity prices

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