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2Ws continue to outperform; PV demand moderates, CVs decline

* Auto OEMs are projected to deliver ~9% YoY volume growth in 2QFY25, mainly driven by a robust performance in the 2W segment. Dispatches for 2Ws are anticipated to have grown ~12% YoY, with domestic volumes rising ~11% and exports growing 13% YoY. PV volumes are projected to remain flat YoY, while CV volumes are likely to decline 10% YoY. Apart from 2Ws and 3Ws, tractor volumes are projected to see ~7% YoY growth.

* Revenue and EBITDA for our OEM coverage universe (ex-JLR) are expected to grow ~2% and 4% YoY during the quarter, respectively, while PAT is likely to remain flat. EBITDA margin is anticipated to improve 30bp YoY at 13.0%, driven largely by moderate commodity costs and favorable product mix. However, EBITDA margin is expected to contract 40bp on a sequential basis due to weak demand and rising discounts.

* Commodity costs have turned favorable in 2QFY25, with steel, aluminum, copper, and lead prices declining 5-6% QoQ. However, the full benefit may not be reflected in 2Q due to the lag effect from 1Q, when the commodity basket saw a sequential rise. Meanwhile, rubber prices increased 4% QoQ and have surged ~67% YoY.

* Given the moderation in demand across various segments and a challenging outlook for exports, majority of our coverage companies (19 of 25) saw earnings downgrades (refer to Exhibit 8). While the 2W segment is expected to continue outperforming in FY25, this has already been factored into the recent rally in 2W stocks. Hence, MSIL and MM are our top picks among Auto OEMs, while MOTHERSO and ENDU are our preferred picks in the Auto Ancillaries segment.

Volume growth in 2Q driven by 2Ws and 3Ws; export recovery continues

Auto OEMs are projected to deliver ~9% YoY volume growth in 2QFY25, mainly driven by a robust performance in the 2W segment. The 2W segment is likely to have grown ~12% YoY, with domestic volumes growing ~11% YoY and exports growing 13% YoY. The 3W segment is likely to have registered ~5% YoY growth, fueled by a 7% rise in domestic volumes, while exports saw a modest 1% uptick. On the other hand, PV growth momentum has slowed, with overall volumes remaining flat YoY. The passenger car segment is likely to have reported a 3% YoY decline, while the UV segment is expected to post ~2% growth. In the case of PVs, the inventory levels have risen due to lower retail demand, leading to higher discounts, making the upcoming festive season crucial, particularly for PV sales. The CV segment continues to face challenges, with overall volumes likely to decline ~10% YoY. Both MHCV and LCVs are projected to see similar declines. CV recovery is anticipated to be slower than expected, though 2HFY25 should be relatively better. Meanwhile, tractor volumes are anticipated to grow 7% YoY. Further, as per our channel checks, the initial festive season has shown limited momentum, making the upcoming Navratri-Diwali period crucial for overall FY25 sales.

Commodity basket remains favorable in 2Q, barring the surge in rubber prices

Revenue/EBITDA for our OEM coverage universe (ex-JLR) is expected to grow ~2%/4% YoY during the quarter, while PAT is likely to remain flat. Commodity prices remained favorable in 2QFY25, with steel, aluminum, copper, and lead prices declining 5-6% QoQ. However, the full benefit may not be reflected in 2Q due to the lag effect from 1Q, when the commodity basket saw a sequential rise. Meanwhile, rubber prices increased 4% QoQ (surged ~ 67% over the past year). EBITDA margin is expected to improve 30bp YoY at 13.0% largely led by moderate commodity costs and favorable product mix. However, we expect EBITDA margin to contract ~40bp sequentially given weak demand and rising discounting pressure. The YoY margin expansion would be driven by a ~20bp/50bp improvement in 2W/CV segments at an aggregate level, while margins for the PV segment are likely to remain flat. In the case of auto ancillaries, the EBITDA margin is expected to contract ~50bp YoY/20bp QoQ to 13%. Also, the sustained rise in rubber prices is expected to drive continued margin pressure for tyre companies in the coming quarters.

Moderating demand outlook results in notable earnings downgrades

Given the moderation in demand across various segments and a challenging outlook for exports, majority of our coverage companies (19 of 25) saw earnings downgrades (refer to Exhibit 8). Our notable earnings downgrades for FY25E include: TVSL (8%), TTMT (4.5%), AL (8%), CIEINDIA (9%), and CEAT (5%). Notably, none of our coverage companies has seen a material earnings upgrade for FY25E.

MSIL / MM remain our top OEM picks; we prefer MOTHERSO/ ENDU in Ancs

While the 2W segment is expected to continue outperforming in FY25, this has already been factored into the recent rally in 2W stocks.

MSIL remains our top pick in OEMs given its continued outperformance in UVs, new launches lined up to address portfolio gaps and attractive valuations. We also like MM given a healthy demand momentum in UVs and expectation of tractor demand revival in tractors. In Auto Ancs, MOTHERSO and ENDU are our preferred picks.

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