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Sequential margin dip for most companies

QoQ production drops led by post festive season dip, as expected      

Expect Q3FY24E revenue for Elara OEM universe (ex-Tata Motors) to improve 16% YoY (-2% QoQ). Revenue for ancillaries may grow 16% YoY (+2.3% QoQ). Q3 production dipped sequentially across segments as Q2 was marked by higher production to cater to festive season demand, post which demand saw seasonal softness. 2W production has likely declined 2% QoQ (+18% YoY) and PV production fell ~11% QoQ (+5% YoY). MHCV production likely dipped 6% QoQ (-1% YoY).       

Expect QoQ margin dip for all OEMs except TVSL and TTMT

Most OEMs are expected to report sequential EBITDA margin dip owing to weaker mix (Maruti Suzuki, Bajaj Auto, Eicher Motors) and operating leverage (Maruti Suzuki, Ashok Leyland). Tata Motors is expected to benefit from higher volumes and mix at JLR and improving mix in PV business. We expect M&M’s EBITDA margin to dip 50bp QoQ led by World Cup sponsorship expenses, partially offset by better tractor mix.

Elara Auto Ancillary universe may post a revenue growth of 16% YoY/2% QoQ, while EBITDA growth may be 38% YoY/3.5% QoQ in Q3E. Within Ancillaries tyre companies are expected to post QoQ margin compression for India business, while SAMIL is expected to post sequential margin uptick. Given the lower production for PV on a QoQ basis we expect around 50bp QoQ margin compression for Uno Minda, while revenue growth of 18% YoY will continue to outpace industry growth.

Raw materials to turn adverse on a QoQ basis

While gross margin may slightly drop sequentially led by a rise in RM costs, the impact of RM led margin compression will not be meaningful.

Key input commodity costs rose in Q3 – Steel was up 1.1% QoQ, aluminum 2.3% and rubber 1.6%, while lead was down 1.7% QoQ and copper 1.1% QoQ.     

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

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