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Uneventful quarter

Weak domestic outlook; global outlook marred with uncertainty

* Auto OEMs within our coverage universe are expected to deliver ~6% YoY volume growth in 4QFY25. However, the end-market demand in 4Q has been weaker than the headline number suggests. Overall, growth was largely driven by new launches from MM, TVS and RE, while HMCL, BJAUT, HMI and MSIL posted subdued growth. CVs continued to witness weak demand.

* For our OEM coverage universe (excl. JLR), we expect revenue/EBITDA/PAT to grow ~7%/5%/2% YoY in 4QFY25. Within this, TVS (+39%), MM (+19%), Eicher (+20%) and AL (+14%) are likely to outperform peers in terms of earnings growth. On the other hand, Hyundai and MSIL are likely to post an earnings decline.

* For auto ancillaries, we expect our coverage universe to post ~7% growth in revenue and a decline of 4%/10% YoY in EBITDA/PAT in 4Q. It is important to highlight that only 5 out of 16 companies are likely to post earnings growth, with no company expected to post double-digit earnings growth.

* Overall earnings estimate cuts have been moderate in this quarter, with CEAT (-11%/-8%) and MRF (-11%/-13.5%) seeing the highest cuts for FY25E/FY26E. Meanwhile, most other players have seen single-digit earnings cuts.

Demand continues to be weak across segments in 4Q

Auto OEMs within our coverage universe are expected to deliver ~6% YoY volume growth in 4QFY25. However, the end-market demand in 4Q has been weaker than the headline number suggests. For instance, for both PVs and 2Ws, aggregate volume growth of listed entities stood at 4%/6%. However, 6% YoY growth in PVs was largely driven by 15% YoY growth posted by MM. While MSIL’s overall growth stood at 5%, its domestic sales were up only 1% YoY. Similarly, Hyundai volumes declined 1% YoY in 4Q. In 2Ws, the 6% growth was largely driven by 14% growth in TVS and 24% YoY growth in RE. On the other hand, HMCL volumes declined 1% YoY, while BJAUT volumes grew 3% YoY in 4Q. CV demand remained weak even in 4Q, with the top 3 listed OEMs posting just a 2% YoY growth in volumes. The silver lining has been that tractor demand continues to see good revival since 3Q. The two listed tractor OEMs posted strong 19% YoY growth in 4Q

TVS and MM to post margin improvement in 4Q

For our OEM coverage universe (excl. JLR), we expect revenue/EBITDA/PAT to grow ~7%/5%/2% YoY in 4QFY25. While input costs are gradually rising, we expect the bulk of these cost pressures to impact OEM margins from Q1 onwards. Hence, 4Q margins are likely to be largely driven by the product mix and forex movements. At an aggregate level, we expect EBITDA margin for our coverage universe to remain stable YoY. Among our coverage companies, margins are likely to improve YoY for TVS (+70bp) and MM (+100bp), whereas margins may remain under pressure YoY for Hyundai (-200bp), Eicher (-150bp), TTMT (-60bp), and MSIL (-70bp). For auto ancillaries, we expect our coverage universe to post ~7% growth in revenue and a decline of 4%/10% YoY in EBITDA/PAT in 4Q.

Hits and misses in 4QFY25

As highlighted above, we expect our auto OEM coverage universe to post just 2% YoY growth in earnings in 4Q. TVS (+39%), MM (+19%), Eicher (+20%) and AL (+14%)  are likely to outperform peers. On the other hand, Hyundai is likely to see the steepest earnings decline of 21%, due to a contraction in margins. Even MSIL is expected to post a 10% YoY decline in earnings in 4Q, largely due to increase in depreciation. Within our ancillary coverage universe, it is important to highlight that only 5 out of 16 companies are likely to post earnings growth, with no company expected to post double-digit earnings growth. Among the laggards are: Apollo (41% earnings decline), Craftsman (-35%), MRF (-30%), CEAT (-29%), MSWIL (-23%) and CIE Automotive (-19%).

Earnings cuts have been moderate in this quarter

Overall earnings estimate cuts have been moderate in this quarter, with CEAT (- 11%/-8%) and MRF (-11%/-13.5%) seeing the highest cuts for FY25E/FY26E. Meanwhile, most other players have seen single-digit earnings cuts.

MSIL/MM are top OEM picks; prefer ENDU/HAPPY in ancillaries

Except for tractors, which continue to witness healthy demand, all other segments continue to see a subdued demand environment. With the ongoing global tariff war, there is likely to be prolonged uncertainty on the global automotive demand outlook, and hence for ancillary companies with high global exposure, as global OEMs look to adjust their supply chains to the new reality. Hence, we would prefer to avoid companies that have material global exposure, at least in the near term. Among auto OEMs, MSIL and MM remain our top picks, as their core segments— PVs for MSIL/MM and tractors for MM—are relatively better positioned, with scope for continued outperformance vs. peers. In the auto ancillary space, we prefer ENDU and HAPPYFORG, owing to their strong order backlog and ability to outperform core segments.

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