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3QFY25 EBITDA margins for OEM coverage (excl TTMT) universe to expand QoQ by 40bp to ~14.6%

(v/s 14.2% in 2QFY24). This will be led by, 1) gross margins improvement QoQ led by RM tailwinds (Steel) and 2) higher ASPs led by price hikes and favorable mix, offset by moderate volume growth in 2Ws. Companies with overseas exposure may report a weak quarter given decline in global automotive volumes. We expect QoQ margins expansion for AL (+110bp QoQ at 12.7%), EIM (SA +170bp QoQ at 28%). On a broad basis we expect margins expansion across OEM coverage universe but for TVSL where we expect margins to remain flat QoQ at 11.7%. Key RM prices such as Copper/Aluminum grew QoQ by 9%/1% while for Steel/NR/Lead it declined by 6%/-4%/-1% in 3QFY25.

Demand trends mixed across sub-segments –

3QFY25 dispatches largely remained mixed as 2W (led by post festive slack) registered flat to low single digit growth YoY while the same for tractors it grew by double digit. Within 2Ws, sustenance of demand led by high discounts, new launches helped sustain retails in led rural and urban markets, however the pace of growth moderated led by high base. On the other hand, high base, and increased tonnage capacity to keep the CV growth muted. Tractors to continue growth momentum led by positive farm sentiments

Change in EPS across global facing coverage universe; valuations comfort selective – We have not seen material change in EPS across our coverage universe (OEMs and Ancs) for FY25E/26E, especially for domestic business. However, cut EPS by 5-8% of global ancs, especially of ENDU, SONACOMS and MOTHERSO to factor in for recent slowdown in Europe. However, receipt of PLI benefits expected to provide an upside risk to our estimates which can partially cushion moderating volume impact on earnings. With recent valuations contraction the sector is trading at slight discount to historical averages at an aggregate level, however for few names the same is at material discount (v/s 10 LPA) such as BHFC (-25%), EIM (-14%), MSIL (-25%), TTMT (-34%). However, names like TVSL is still at premium (+19%), EXID (+17%), AL (in line to 10 year LPA).

(ADD), EXID (ADD) from ancillaries -

We continue to remain positive on 2Ws (owing to the peak-up in replacement, emerging signs of first-time buyers and sustained recovery post festive. However, we continue to be selective in 2Ws as we like TVSL, EIM. Among ancillaries, we prefer MOTHERSO for engine agnostic global PV play, ENDU for 2W recovery and EXID for strengthening EV narrative in favor of traditional OEMs and cell localization

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