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In Q2FY24, this time, it consists of only half of the festive season. Despite that, companies under over coverage registered a healthy 16% YoY revenue growth. In a similar time frame, softening RM prices and price increase gives headroom to improve the margin for few players and for certain players to regain their market share in the festive season. Overall, retail sales during Q2FY24 for PV was 0.93mn units and 2W was 3.8mn units and till 19th November, festive to festive retail sales for PV and 2W was up by 8.7% and 16.5% YoY respectively. The revenue for the companies under our coverage grew by 16% YoY, and EBITDA saw a whopping 38% YoY growth, largely due to RM cost reduction and operating leverage benefits. The EBIDTA margin expanded by 236bps YoY and 185bps QoQ. 2W OEMs experienced revenue growth of 8.2% YoY basis whereas PV OEM saw a 21% YoY growth and component manufacturers registered a growth of 14% YoY.

Second Half for Automotive sector expected to be better than H1FY24 as peak festive sales fell in Oct-Nov period and RM cost continued to remain flat. We expect PV OEMs to lead the growth on the revenue front. For 2W segment, 125+CC is doing better and OEMs with premiumisation product portfolio could do better as in 2W industry buying pattern has shifted towards higher CC segment. Additionally, export volume is rebounding but still has a long way to go.

We expect auto ancillary companies under our coverage to continue benefiting from the trend of premiumisation and technological upgrades, as well as the EV transition, which is evident from their product offerings. Our top picks in the auto space are MSIL, Lumax Industries and Sansera Engineering.

Top Picks:

1. Maruti Suzuki India | Rating: ADD | Target Price – Rs. 11,891

* View and Valuation: MSIL’s profitability improvement is led by RM benefit, increase in ASP due to higher share of UV and benefit of operating leverage. Going forward, a favourable product mix and increasing share of exports (where ASP is higher than domestic portfolio) will further improve the MSIL profitability. We remain positive on long term growth story led by: 1) a large distribution network (3,719 sales outlets, 4,726 service touch-points); 2) largest low emission product portfolio offering; 3) new/refresh launches in the UV and EV segment; 4) capacity expansion (to 4mn units by 2030-31); and 5) growing export volume (addition of newer model from UV segment). We expect MSIL's revenue/PAT to grow at a CAGR of 16%/24% over FY23-26E. We introduce FY26 and roll forward valuation to Sep-25E EPS and arrive at a TP of Rs. 11,891 with the ADD rating (26x Sep-FY25E EPS).

2. Lumax Industries | Rating: OUTPERFORM | Target Price – Rs. 2,974

* Chakan plant is operational from Q3FY24 and company expects revenue of around Rs.4-5bn in FY25 and Rs.6bn in FY26 and further Phase-II will commence operation from H2 of FY26. Peak revenue of phase-II would be around Rs8-10bn over next 2-3 years. We expect this new plant will set the stage for Lumax Industries to grow better than industry and also help to increase margin trajectory in the 10-12% band as the new plant is more efficient compared to other existing facilities.

* View: We have a positive view on the long term growth story of Lumax Industries led by: 1) its strong relationship with the majority of auto OEMs; 2) healthy demand in the PV segment; 3) increasing capacity in PV segment (will add incremental annual revenue of Rs.5-6bn from FY25 onwards); 4) localization of electronic facility levers for margin expansion; and 5) addition of new clients and models. We ascribe a target price of Rs.2,974 (17x of FY25E EPS) and maintain OUTPERFORM.

3. Sansera Engineering | Rating: OUTPERFORM | Target Price – Rs. 1,030

* SEL has already started production of aluminium forged components, and all the existing lines are fully booked, with plans to add more lines. SEL also won a new order in the light-weighting segment from a UK-based PC manufacturer which is expected to start SOP from H2FY24. In the 2W segment, premiumization continues to increase, and some of SEL's customers are aggressively adding premium content to their vehicles like HD and Triumph. The new capex is largely towards the light-weighting products. We expect the light-weighting and premiumization trend to continue supporting better-than-industry growth..

* Outlook & Valuation: Given the shift in the industry such as preference to higher CC segment from lower CC in 2W and addition of more premium components with light-weighting material, auto industry is poised to register healthy growth going forward. SEL is transforming itself from an automotive to a non-automotive and xEV-agnostic products supplier by its ability to adopt the changes. In the medium to long term, we expect SEL will experience substantial revenue growth led by: 1) an increasing proportion of revenue being generated by the nonautomotive segment; 2) securing new orders for engine-agnostic components; 3) rise in the share of aluminium components; and 4) revival in the export business, which will aid in margin expansion in the coming quarters. We expect revenue/EBIDTA/PAT to grow at a CAGR of 16%/21%/27% over FY23-25E and value the stock based on 23x FY25E EPS and arrive at a TP of Rs.1030 with Outperform rating.

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