Automobiles Sector Update : YoY margin compression for most companies By Elara Capital
We expect revenue of our Auto OEM universe (ex-Tata Motors) to improve ~10% YoY and ~3% QoQ in Q4FY25E. Driven by low single-digit production growth across most segments (except CVs), we expect ancillary companies under our coverage to see a revenue growth of 7% YoY and 3% QoQ.
Despite a moderation in demand, major PV OEMs undertook price hikes in January 2025 across vehicle range to offset escalating input and operational cost. Overall demand remained muted in Q4FY25 with limited retail enthusiasm. Dealer sentiments have remained cautious in Q4FY25 with increasing dealer inventory. Topline expansion in Q4 is expected to be a function of price hikes along with improved mix. On a QoQ basis, the model mix is favorable for TVS Motor, Bajaj Auto while it is adverse for Maruti Suzuki, Eicher Motors. In terms of operating leverage on a QoQ basis it is favorable for Maruti Suzuki, Eicher Motors, Ashok Leyland and Tata Motors.
EBITDA margins contract for most companies YoY: Fourteen out of 21 companies under our Auto universe are likely to witness a YoY drop in EBITDA margin. Margin pressure is largely attributed to fading operating leverage, high competitive intensity and escalating input cost. For our OEM universe, positive response to new model launches is likely to lead to margin expansion for M&M and TVS Motors by 50bps/90bps YoY, respectively. Tata Motors is likely to witness a margin contraction of 120bps YoY, led by global headwinds impacting the JLR segment.
Within our Auto Ancillary universe, we expect EBITDA margin to compress 80bps YoY, mainly due to weakness in demand impacting production growth across most segments. Tyre companies are expected to be the worst hit with margin compression, driven by a surge in natural rubber price and weak OE demand (though partially offset by stable replacement demand). Overall, most ancillary companies are expected to report a YoY margin contraction, led by weak demand trends and rising input cost.
Expect 2W volume growth to outperform; margin levers limited: With stable demand in 2W, we expect domestic 2W industry for FY26E growth at ~8% while PV growth is expected to grow at 5% FY26E (above SIAM estimates of 1-2%). We remain cautious on the CV industry and expect a 4% growth in FY26E. Tractors are expected to grow ~4% in FY26E led by normal monsoons outlook in FY26E.
We expect 2Ws to continue to outperform other segments through FY26E-27E. Global exposed ancs and Tata Motors-JLR are expected to face pressures given global slowdown as well as Trump-tariff related pressures. Our top picks in our OEM universe include TVS Motor and M&M followed by Maruti Suzuki and Bajaj Auto; In Ancs our top picks remain Uno Minda and Gabriel India. We continue to remain negative on ancillary companies such as SAMIL, Motherson Sumi Wiring India Ltd and tyres segment
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