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Gross margin to contract sequentially as RM prices inch up… …

however, volumes to grow across all segments (ex-tractors) in 3QFY24

* The third quarter witnessed healthy demand across the segments, as volumes are expected to grow 18% YoY. The 2Ws outperformed other segments and is likely to rise ~20% YoY. Volumes for 3Ws, PV, and CV are likely to improve ~15%, 12%, and 3% YoY, respectively, while the same should decline 4% YoY for tractors. Overall exports are anticipated to recover gradually as the supply chain situation improves further, followed by improving macro outlook in key geographies.

* Commodity prices have remained favorable over the last few quarters. Inflationary pressures peaked in 3QFY23, following which, prices corrected for most of the commodities. Despite a slight increase in some of the RM prices sequentially, we expect gross margin to improve ~100bp YoY for our OEM coverage universe in 3QFY24.

* We estimate EBITDA margin to improve YoY for the seventh successive quarter, with a 160bp YoY gain (+40bp QoQ) for our Auto OEM Universe (ex-JLR). This will be driven by better gross margin, cost efficiencies, and operating leverage. The benefit of healthy growth in underlying industries coupled with cost efficiencies should also result in strong earnings growth for our Ancillary coverage during the quarter.

* There has not been any material change in the FY24 earnings estimate for our coverage universe. We are already witnessing a reversal in demand patterns, especially in the 2Ws, wherein we anticipate a high growth potential. As compared to other categories, 2Ws have a relatively better scope for growth over FY23-26E. On the other hand, we turn cautious about the PV growth outlook due to a slowdown in demand trends and a high base.

Healthy volume growth across segments with a strong recovery in 2Ws demand

The third quarter witnessed healthy demand across the segments, as volumes are expected to grow 18% YoY. The 2Ws outperformed other segments and is likely to rise ~20% YoY, driven by 24%/9% YoY growth in domestic/exports. Dispatches for SUVs to remain healthy led by order book execution and improvement in supply chain situation. However, the lower-end PVs continued to witness subdued demand. As a result, we expect PV volumes to grow ~12% YoY, with a 30% YoY growth in SUVs and a decline of 7% YoY in lower-end PVs. CV wholesale is likely to grow ~3% YoY driven by better demand in underlying industries and a healthy fleet utilization level. Within CVs, MHCV/LCVs are likely to grow 6%/2% YoY. Tractor wholesale is expected to decline 4% YoY due to lower rainfall and a higher base of last year. The 3W volumes are expected to grow 15% YoY as demand has come back to normal. Overall exports are anticipated to recover gradually as the supply chain situation improves further, followed by improving macro outlook in key geographies.

EBITDA margin expansion continues on a YoY basis

We estimate EBITDA margin to improve YoY for the seventh successive quarter, with a 160bp YoY gain (+40bp QoQ) for our Auto OEM Universe (ex-JLR). This will be driven by better gross margin, cost efficiencies, and operating leverage. Though gross margin is expected to improve ~100bp YoY led by lower RM costs and product mix, it is likely to contract ~30bp sequentially because of a slight increase in the key commodity prices. We are now modeling a slender increase in key commodity prices in the coming quarter. The benefit of a healthy growth in underlying industries

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