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4QFY24 review: Sustaining momentum Key highlights of 4Q were:

(1) OEMs—strong top-line growth, richer product mix and RM tailwinds driving good margin expansion; demand trends remain steady for 2W; however, growth moderation is seen in the PV segment; uptick in commodity prices needs to be monitored; (2) diversified auto ancillaries— strong automotive volume growth, coupled with pricing adjustments, drove strong earnings growth; and (3) tire companies—domestic tire companies’ operating performance impacted by muted demand trends and EPR provisions. TTMT and M&M remain our top picks in the OEM segment, whereas we prefer SAMIL and Uno Minda in ancillary space.

4QFY24: OEMs continue to report strong operating performance

Aggregate revenues of auto OEMs were up 14% yoy in 4QFY24, driven by (1) 27% yoy growth in 2W production volumes, (2) 10% yoy growth in PV production volumes, (3) richer product and (4) price hikes on account of regulatory changes that were partly offset by an 8-15% decline in MHCV and tractor volumes. EBITDA of the auto OEMs grew 37% yoy on operating leverage benefit, richer product mix and RM tailwinds. As a result, EBITDA margin improved by 180 bps yoy to 14.1%. Further, gross margins expanded by 260 bps yoy. Overall, adjusted PAT grew 29% yoy in 4QFY24.

Strong automotive demand aided growth for diversified auto ancillaries

Diversified auto ancillaries’ revenue growth stood at 20% yoy in 4QFY24, led by strong growth in the production volumes of the 2W and PV segments and consolidation of announced acquisitions (SAMIL). EBITDA increased by 29% yoy in 4QFY24, driven by (1) operating leverage benefits, (2) pricing adjustments and (3) richer product mix. Gross margins expanded by 310 bps yoy due to richer product mix and pricing adjustments. Overall, PAT grew by 71% yoy, partly driven by 110% yoy PAT growth for SAMIL.

Muted volume growth and EPR provision impacted tire companies’ performance

Tire companies, especially MRF, CEAT and Apollo, posted a weak quarter compared to our expectations, owing to (1) weak demand trends in the CV replacement segment and (2) obligations pertaining to extended producer responsibility (EPR). Apollo and CEAT have announced price hikes to offset the obligations related to EPR as well as RM headwinds, whereas MRF has not yet announced any price hike, which needs to be monitored. Balkrishna Industries reported a strong quarter, led by (1) strong volume growth, (2) richer product mix and (3) tight cost control and favorable FX.

JLR continues to outperform the global luxury OEMs

The luxury passenger vehicle market remained flat yoy, whereas JLR volumes grew 16%, owing to a strong order backlog. Further, the company continues to improve the profitability sequentially with an EBIT margin improvement of 40 bps in 1QCY24, led by (1) operating leverage benefits and (2) richer product mix. EBIT margins of Porsche and Audi declined significantly by 650/520 bps sequentially in 1QCY24. EBIT margins for Mercedes and BMW changed marginally sequentially in 1QCY24.

Mixed performance across bearing companies in 4QFY24

Bearing companies revenue grew by 9% yoy, driven by (1) strong growth in the railway segment (Timken), (2) uptick in aftermarket division (SKF, Schaeffler and Timken) and (3) strong growth in PV and 2W production volumes. EBITDA margin of the SKF/Timken expanded by 220/300 bps yoy in 4QFY24, whereas Schaeffler India EBITDA margins contracted by 100 bps over the same period. EBITDA grew 13% yoy, whereas PAT grew 20% yoy in 4QFY24.

Upswing in metal and rubber prices may weigh on margins for OEMs and tire companies

International and domestic natural rubber prices (spot) have risen by 16-21% from 3QFY24 average levels, driven by persistent supply concerns and adverse weather concerns in key rubber producing countries. Also, the metal prices (spot), especially aluminum and copper, witnessed a sharp upswing of 18-20% when compared to 4QFY24 average levels month on account of escalating geopolitical tensions which may lead to supply disruptions (Israel-Gaza war, unrest in New Caledonia), (2) anticipated shortage of supply on account of expected surge in demand from China with latest stimulus announcement by the Chinese government and (3) expected rate-cut by central banks. We believe the surge in metal prices to have a higher impact on 2W OEMs when compared to PV, CV and tractors owing to higher Aluminum content as % of sales. Overall, we expect if the current metal and rubber prices sustain at current levels, there can be 80-170 bps margin contraction for OEMs and 300 bps margin erosion for tire companies (assuming no price changes).

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