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Festive season to see healthy volume growth; exports recovering

Moderating commodity costs and operating leverage to aid margins

* From a demand standpoint, 2QFY24 was a mixed bag as PV and CV continued to expand YoY but 2W and tractors declined. While we anticipate a YoY decrease in 2W volume, the domestic and export markets appear to be recovering for 2W. Dispatches for SUV remained strong fueled by order book execution and improvement in supply chain situation. However, demand moderated for lower-end PVs. Among all the segments, MHCV appeared to be better placed despite a drop in discounts, driven by healthy demand across most of the underlying industries.

* On a YoY basis, wholesale volumes are estimated to grow ~15% for MHCV, ~11% for PV, 20% for 3W and 1% for LCV. However, we estimate 2QFY24 volumes to decline 2% YoY for 2W and 4% YoY for tractors. Domestic 2W volumes are expected to decline 3% YoY, whereas exports are likely to grow 3.5% YoY.

* We estimate the EBITDA margin of our Auto OEM Universe (ex-JLR) to expand for the sixth consecutive quarter on a YoY basis. EBITDA margin is likely to improve 200bp YoY (+50bp QoQ) driven by lower RM costs, favorable FX and operating leverage benefits.

* We are building our estimates based on stable commodity costs; however, we expect the benefits of favorable mix/FX and operating leverage to accrue and lead to sustained margin recovery. There has not been any material change in our FY24 earnings estimate for our coverage universe except for MRF (+5%).

Signs of demand moderation visible in PVs; 2W witnessing gradual recovery

From a demand perspective, 2QFY24 was a mixed bag as PV and CV continued to expand YoY but 2W and tractors declined. While we anticipate a ~2% YoY drop in 2W volume in 2QFY24, it continues to see gradual recovery especially in the exports market, which is expected to grow ~3.5% YoY. Dispatches for SUV remained strong fueled by order book execution and improvement in supply chain situation. However, demand moderated for lower-end PVs. As a result, we expect PV volumes to grow ~11% YoY in 2QFY24. CV wholesales are likely to grow ~6% YoY driven by better demand in underlying industries and healthy fleet utilization level. However, LCV volumes are projected to remain flat YoY due to high base. Tractor wholesales are anticipated to decline 4% YoY due to erratic monsoon across key regions and high base of last year. 3W volumes are likely to jump 20% YoY as demand is reverting to full normalcy.

Softening commodity costs to result in margin expansion

We estimate the EBITDA margin of our Auto OEM Universe (ex-JLR) to expand for the sixth consecutive quarter on a YoY basis. EBITDA margin is likely to improve 200bp YoY (+50bp QoQ) driven by lower RM costs, favorable FX and operating leverage benefits. Except for MM (weak tractor volumes) and HMCL/ EIM (flattish EBITDA margin), all other OEMs are likely to report margin expansion on QoQ basis. We are building our estimates based on stable commodity costs; however, we expect the benefits of favorable mix/FX and operating leverage to accrue and lead to sustained margin recovery.