IGI Logo

Reversal in demand trends for PVs & 2Ws; OE margins likely to remain stable QoQ

*Auto OEMs are expected to deliver just ~6% YoY volume growth in 3QFY25E despite the festive season. While 2W demand turned weak in 3Q, PV OEMs saw a better demand uptick, especially in the festive season. Tractor demand saw a marked revival in 3Q, a clear indicator of improving rural sentiment. However, CVs continued to see weak demand.

*Given stable input costs QoQ, we expect OEMs within our coverage universe to post stable margins. Revenue/EBITDA/PAT for our coverage companies (excl. JLR) are expected to grow ~9%/9%/6% YoY in 3QFY25. MM (+30%), Eicher (+12%) and MSIL (+11%) are likely to outperform peers. On the other hand, Hyundai Motors is likely to see the steepest earnings decline of 29%.

*For auto ancillaries under our coverage, we expect ~11%/3%/10% YoY growth in revenue/EBITDA/PAT in 3QFY25. We expect SAMIL (+47%), Endurance (+38%), BKT (+24%), Happy Forge (+18%), Exide (+17%) and Bosch (+15%) to be the top earnings growth drivers. On the other hand, tyre companies are likely to continue to post earnings declines due to persistent input cost pressure.

*In 3QFY25, we have further cut estimates for 7 out of 26 companies, with no material upgrades, as we remain cautious on the prospects of a meaningful demand recovery

*across segments.

Subdued dispatches even in festive season; demand outlook remains weak

Auto OEMs are expected to deliver just ~6% YoY volume growth in 3QFY25 despite the festive season. The incremental worrying factor is that the 2W segment, which had been the key growth driver for the Auto sector in 1HFY25, saw a marked slowdown in 3Q. The four listed 2W OEMs have posted flat growth YoY in domestic 2W sales in 3Q (vs. 15% growth in 1H). The only silver lining for 2W OEMs has been that exports are now seeing a gradual recovery in key markets, including Africa. CV demand remained weak even in 3Q. The top three listed OEMs posted flat growth YoY in CVs in 3Q. On the other hand, PV OEMs, which saw weak demand in 1H, saw a much improved demand trajectory in 3Q. The top four listed PV OEMs posted 10% YoY growth in PVs in 3Q (vs. flat growth for PV industry in 1H). Further, the other positive factor for the sector has been that tractor demand saw a marked recovery in 3Q. The two listed tractor OEMs posted strong 17% YoY growth in 3Q (vs. flat growth YoY in 1H for industry).

Commodity basket remains stable in 3Q, barring the surge in rubber prices

Revenue/EBITDA/PAT for our OEM coverage universe (excl. JLR) are expected to grow ~9%/9%/6% YoY in 3QFY25. The raw material basket for auto OEMs is likely to remain stable QoQ. As a result, we expect margins for our OEM coverage universe to largely remain stable on YoY and QoQ basis. For auto ancillaries under our coverage, we expect our coverage universe to post ~11%/3%/10% YoY growth in revenue/EBITDA/PAT in 3QFY25. Tyre companies are likely to continue to witness margin pressure given rising input costs even in 3Q.

Estimated hits and misses in 3QFY25

As highlighted above, we expect the auto OEM under our coverage to post 6% YoY earnings growth in 3Q. MM (+30%), Eicher (+12%) and MSIL (+11%) are likely to outperform peers. On the other hand, Hyundai Motors is likely to see the steepest earnings decline of 29%, due to a contraction in margins and lower other income. For our ancillary coverage universe, we expect SAMIL (+47%), Endurance (+38%), BKT (+24%), Exide (+17%), Happy Forge (+18%) and Bosch (+15%) to be the top earnings growth drivers. On the other hand, tyre companies are likely to continue to post earnings declines due to persistent input cost pressure.

Yet another quarter of earnings estimate cuts

2QFY25 had witnessed significant earnings downgrades for most of our coverage companies, driven by weak demand and adverse macroeconomic factors. In 3QFY25, we have further cut our estimates for 7 out of 26 companies, with no material upgrades, as we remain cautious about the prospects of a meaningful demand recovery across segments. Notable downgrades include BJAUT (13%), TTMT (6%), AL (7%), MOTHERSO (5%), SONACOMS (16%), MSUMI (7%) and HAPPYFORG (6%). A muted demand outlook across segments in the domestic auto industry and uncertainty in export demand make us maintain our cautious stance on the sector.

MSIL/HYUNDAI our top OEM picks; prefer MOTHERSO/ENDU/HAPPY in Ancs

Except for the tractor segment, which is seeing a healthy demand uptick, we are not seeing any signs of healthy growth in any other key auto segments, at least in the near term. MSIL is our top pick among auto OEMs as its upcoming new launches are expected to continue to help improve the mix and drive healthy earnings growth. We also like Hyundai as it appears well-aligned to benefit from the industry trends toward UVs. Among ancillaries, we prefer MOTHERSO, ENDU and HAPPYFORG.

For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412