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PVs continue to see steady demand, demand weakness visible in others

* The fourth quarter is usually seasonally the best quarter on YoY and QoQ basis. However, in 4QFY24, only the PV segment posted healthy growth of 19% /20% both on YoY and QoQ basis, whereas other segments saw a slowdown in demand. The 2W segment is estimated to have posted 14% YoY growth owing to a low base, but, on a QoQ basis, volumes are likely to have declined 12%, as per our estimates. Also, CV wholesales may fall ~3% YoY over a high base of last year and also due to lower demand before elections. Overall volume growth is expected to be ~14% YoY (excluding tractors).

* While we expect input costs to remain stable QoQ in 4Q, we expect gross margin to improve ~310bp YoY for our OEM coverage universe in 4QFY24 led by improved product mix (especially in 2Ws and PVs) and lower input costs.

* We estimate EBITDA margin to remain stable sequentially, with ~80bp YoY gain for our Auto OEM Universe (excluding JLR). This will be driven by better gross margins and cost efficiencies. The benefit of healthy growth in underlying industries, coupled with cost efficiencies, should result in strong earnings growth for our ancillary coverage during the quarter.

* There have been a few notable changes in FY25/FY26 earnings estimates for our coverage universe. We are positive on the PV segment, anticipating improved earnings growth, led by a better product mix amid steady demand for SUVs. Although the 2W segment is expected to witness high-single-digit volume growth in FY25E, this seems to have been already priced into the recent stock price movements.

PVs continue to see steady demand, demand weakness visible in others

* The fourth quarter is usually seasonally the best quarter on YoY and QoQ basis. However, in 4QFY24, only the PV segment posted healthy growth of 19% /20% both on YoY and QoQ basis, whereas other segments saw a slowdown in demand. The 2W segment is estimated to have posted 14% YoY growth owing to a low base, but, on a QoQ basis, volumes are likely to have declined 12%, as per our estimates. Also, CV wholesales may fall ~3% YoY over a high base of last year and also due to lower demand before elections. Overall volume growth is expected to be ~14% YoY (excluding tractors).

* While we expect input costs to remain stable QoQ in 4Q, we expect gross margin to improve ~310bp YoY for our OEM coverage universe in 4QFY24 led by improved product mix (especially in 2Ws and PVs) and lower input costs.

* We estimate EBITDA margin to remain stable sequentially, with ~80bp YoY gain for our Auto OEM Universe (excluding JLR). This will be driven by better gross margins and cost efficiencies. The benefit of healthy growth in underlying industries, coupled with cost efficiencies, should result in strong earnings growth for our ancillary coverage during the quarter.

* There have been a few notable changes in FY25/FY26 earnings estimates for our coverage universe. We are positive on the PV segment, anticipating improved earnings growth, led by a better product mix amid steady demand for SUVs. Although the 2W segment is expected to witness high-single-digit volume growth in FY25E, this seems to have been already priced into the recent stock price movements.

PV and CV OEMs to see healthy margin expansion QoQ

On a YoY basis, margins for our Auto OEM universe (excluding JLR) are expected to be higher (+80bp YoY) at 12.5%, driven by lower input costs and operating leverage benefit. However, we expect EBITDA margin to remain stable sequentially. Costs for key commodities such as steel, aluminum and copper were largely stable sequentially in 3QFY24. However, in 4QFY24, steel prices declined ~5% QoQ, while copper prices increased ~3% and aluminum remained flat. We expect CV OEMs to see the best margin improvement on a QoQ basis, largely driven by operating leverage benefits. PVs should see steady margin improvement, led by improved volumes QoQ and an improved product mix. However, 2W OEMs are expected to see largely stable margins as lower volumes QoQ are likely to be offset by improved mix. We are now modeling a slender increase in key commodity prices in the coming quarter. The benefit of a healthy growth in underlying industries, coupled with cost efficiencies, should result in strong earnings growth for our ancillary coverage in 4Q.

Prefer PVs as we estimate stable earnings growth

We are positive on the PV segment, anticipating improved earnings growth, led by a better product mix amid steady demand for SUVs. Although the 2W segment is expected to witness high-single-digit volume growth in FY25E, this seems to have been already priced into the recent stock price movements. While we expect CV growth to moderate up to 1HFY25 largely due to a slowdown in industrial activity ahead of elections, we expect demand to revive in 2HFY25. We expect a volume CAGR of 8%/6%/ 5% for 2Ws/PVs/Tractors over FY24-26. For 3Ws/CVs, we anticipate a volume CAGR of 8%/7% over the same period.

Valuation and view

We have made notable changes in few of our coverage companies (refer Exhibit 8). Within the auto OEM segment, we remain positive on MM and AL. Among auto ancillaries, we like Craftsman and SAMIL.

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