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Proportion of EVs increasing, margin pressure; maintaining a Buy

For Gabriel India, demand is strong in the automotive segment, while two wheelers remained under severe pressure. Launches in passenger vehicles, where Gabriel has a major share of business, augur well for long-term growth. For CVs, it plans to leverage its dominance in domestic markets and subsequently enter exports. On EVs, the proportion continues to grow. We maintain a Buy at a revised TP of Rs226 (15x FY25e)

Growth in passenger cars and railways, 2Ws weak. Q3 FY23 revenue grew 17% y/y, but was down 11% q/q, to Rs7.1bn, on launches in 4Ws and CVs. 2W off-take was tepid in the quarter, but is expected to revive in FY24. The OEM business grew 1% y/y, but was down 26% to Rs5bn on weakness in 2Ws. The aftermarket business fell 10% y/y, 18% q/q, to Rs788m. Exports were up 18% y/y, 1% q/q, to Rs242m, despite losing VW Russia business. With respect to PV launches, Gabriel has a 100% share of business and supplies to Grand Vitara, Brezza, Jimny, and Hyryder. Similarly for EV 2Ws, it enjoys a 66% market share and 100% of business with OEMs like Ola, Okinawa, Ampere, TVS, Ather, etc and the EV proportion to overall sales is at 9% (vs. 3% in FY22). Similarly for CVs, it plans to enter global markets in the near term. For Railways, it is the only qualified supplier for Vande Bharat trains and the newly developed electric locomotives. Accordingly, we expect 19% growth in FY24 and FY25

Margins to improve in the next two years. The Q2 FY23 margins contracted 14bps to 7.2%. RM prices through happen with a quarter’s lag and we expect margins would improve in Q4 as commodity prices have cooled a bit in the last quarter. As operating leverage kicks in, we expect margins to expand to 7.5% in FY23 and 8% in FY24.

Valuation. We expect a 19% CAGR in revenue over FY23-25 and 26% earnings growth, leading to an EPS of Rs15.1. We maintain our Buy rating, at a revised TP of Rs226 (15x FY25e).

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