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Margins to improve for OEMs, mixed bag for auto ancillary plays

Expect Q4FY24E revenue for Elara OEM universe (ex-Tata Motors) to improve 14% YoY (+5% QoQ). Revenue for ancillaries may grow 15% YoY (+3% QoQ). Also, Q4 production has likely improved sequentially for PVs, 2Ws, CVs, while possibly declining for tractor in Q4E. Expect 2W production to surge 3% QoQ (+29% YoY) and PV production ~20% QoQ (+12% YoY). Also, MHCV production may likely improve 4% QoQ (-11% YoY)

Operating leverage and product mix improves for most

OEMs Most OEMs are expected to report a sequential EBITDA margin expansion led by improving product mix and operating leverage. Expect ASPsto improve QoQ sharply for Bajaj Auto, Hero MotoCorp and Eicher Motors led by enhancing product and export mix. However, in Bajaj’s case the impact of higher ASPs on a QoQ basis will be partially offset by higher EV volumes which is margin dilutive. MSIL’s margin may see a sharp 140bps QoQ improvement led by operating leverage.

Expect Elara Auto Ancillary universe to post a revenue growth of 15% YoY/3% QoQ, while EBITDA growth may be 26% YoY/3% QoQ in Q4E. Ancillary tyre companies are expected to post a QoQ margin compression led by a sharp surge in natural rubber prices. SAMIL may post a sequential margin improvement led by integration of new acquisitions and operating leverage. Given the sequential improvement in PV/2W production, we expect ~20bps QoQ margin expansion for Uno Minda, while revenue growth of 28% YoY may continue to outpace industry growth.

Raw material prices range bound QoQ

While gross margin ex of mix may slightly drop sequentially led by a rise in RM cost, the impact of RM-led margin compression may not be meaningful.

Key input commodity costs rose in Q4 – copper was up 3.2% QoQ, steel 1.7% QoQ and rubber 10%, while aluminum was flat and lead was down 2.3% QoQ.

Our top picks in the auto OEM space are Maruti Suzuki, Bajaj Auto, TVS Motor and within ancillaries, Samvardhana Motherson International and UNO Minda.

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