IGI Logo

Underlying industry demand remains strong

* Aggregate auto demand for OEMs under our coverage universe grew 19.1% YoY in 2QFY27. Segmental trends: 2W up 19%, PV up 25%, CV up 37%, and tractors down 4%.

* Due to JLR earnings turning positive in 2QFY27 over losses in previous fiscal, OEM earnings are expected to grow ~65% YoY, despite commodity pressure weighing on margins QoQ. Ex-TMPV, earnings growth is expected to be modest at ~4% YoY as significant margin headwinds offset strong revenue growth.

* Auto ancillaries within our coverage universe are likely to post ~21% revenue growth and a much lower PAT growth of ~4% due to margin pressure.

* Earnings outperformers among OEMs are expected to be TVSL (+46%), BJAUT (+28%) and TMCV (+26%). HMIL and MSIL are likely to underperform with a PAT decline of 22% and 19% respectively. Due to headwinds from JLR, TMPV’s profit is expected to decline ~50% QoQ, though better than the losses it had posted last fiscal.

* In auto ancillaries, key outperformers in 2Q are expected to be Gabriel (52%), SAMIL (+30%), Craftsman (+64%), HFL (32%) and BHFC (27%). Key underperformers are likely to be CEAT (-69%), MRF (-24%) and AMRJ (-21%).

* Our top OEM picks are MSIL, TVSL and MM. Top auto ancillary picks are TENNIND, SPR and HFL.

Demand momentum sustains in 2Q as high base catches up

Demand remained encouraging across segments in 2Q, reflected in strong retail growth reported on Vahan. Consequently, overall auto industry volumes under our coverage grew 19.1% YoY, led by 2Ws (+19%), PVs (+25%) and CVs (+37%). Tractors, however, declined 4% YoY, primarily due to a high base and a patchy monsoon. Within 2Ws, all OEMs delivered healthy double-digit growth during the quarter. In PVs, TMPV and MSIL outperformed the industry, while HMIL underperformed peers. In CVs, TMCV led the segment with 42% YoY growth, followed by VECV (+31%) and AL (+28%). Within tractors, MM volumes declined 6% YoY, while Escorts remained flat YoY

Margins to remain under pressure in 2Q amid commodity inflation

* On the back of a healthy recovery in volumes, auto OEM companies under our coverage are expected to post a strong 31% YoY revenue growth. We expect 2W OEMs to post ~26% revenue growth, followed by PV OEMs at 30% and CV OEMs at 39%. However, prices of key inputs have been on an uptrend since 3QFY26, and despite the price hikes, there is likely to be some under-recovery due to the sharp increase in a short span. As a result, aggregate EBITDA margin for our OEM coverage universe is estimated to remain flat YoY at 9.8%. 2W OEMs are expected to post a ~60bp YoY decline in margins, while CV OEMs are expected to see a much sharper ~250bp YoY decline. PVs are an outlier and are expected to see a ~50bp YoY improvement in margins, primarily due to JLR returning to profit YoY from EBITDA loss. However, excluding the impact of TMPV, PV OEMs 

* On the back of a healthy recovery in volumes, auto OEM companies under our coverage are expected to post a strong 31% YoY revenue growth. We expect 2W OEMs to post ~26% revenue growth, followed by PV OEMs at 30% and CV OEMs at 39%. However, prices of key inputs have been on an uptrend since 3QFY26, and despite the price hikes, there is likely to be some under-recovery due to the sharp increase in a short span. As a result, aggregate EBITDA margin for our OEM coverage universe is estimated to remain flat YoY at 9.8%. 2W OEMs are expected to post a ~60bp YoY decline in margins, while CV OEMs are expected to see a much sharper ~250bp YoY decline. PVs are an outlier and are expected to see a ~50bp YoY improvement in margins, primarily due to JLR returning to profit YoY from EBITDA loss. However, excluding the impact of TMPV, PV OEMs

Ongoing West Asia crisis and RM prices to be key near-term monitorable

* Demand has held up well in 2Q across sectors. However, compared to our earlier expectation of an easing in commodity prices and a gradual recovery in margins from 2Q onward, we now understand that the margins are likely to have remained under pressure in 2Q and it may continue in 3Q as well. This is expected to have a significant impact on earnings for the sector, which is also reflected in the correction in stock prices. Due to such headwinds, we have cut earnings estimates across our coverage universe for FY27/FY28. Major cuts have been seen in CEAT (-32%/-4%), MSWIL (-19%/-15%), AL (-15%/-13%) and BKT (- 17%/-12%).

* We believe that the recent correction in stock prices across the sector has largely factored in the impact of commodity inflation on earnings. Underlying demand remains strong, and we believe regular price hikes will gradually offset the commodity inflation and help drive earnings in the medium term. Any respite in commodity inflation should support earnings recovery and lead to a potential re-rating of the sector. Our top OEM picks are MSIL, TVSL and MM. Among auto ancillaries, our top picks are SPR, TENNIND and HFL.

For More Research Reports : Click Here 

For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH00000041