Top Conviction Ideas: Automobile Industry Q2FY26 Review by Axis Securities
Q2Y26 Auto OEM Review – Growth in 2W/Tractor OEMs
? Financial Performance
* Strong Q2FY26 Outperformance Across Auto OEMs: Revenue/EBITDA in Q2FY26 grew by 16.5%/14.9% YoY, respectively, exceeding our expectations of ~12.6%/11.2% YoY for Auto OEMs under our coverage. Revenue growth was largely driven by mid-single-digit industry growth across 2Ws/PVs/CVs and mid-teens volume growth in the tractors, and the ongoing premiumization trend. Revenue/EBITDA grew by 14.5%/18.6% QoQ against our estimates of 10.7%/14.8% QoQ, respectively. The YoY improvement in EBITDA margin was driven by richer product mix (higher exports) and price hikes implemented over the past year. PAT grew by 14.9% YoY versus our estimate of 21.2%, and increased by 4.7% QoQ (our estimate: 10.3%).
* Margin Trends Across OEMs: Maruti Suzuki and Eicher Motors faced downward pressure on margins by 134 bps and 139 bps, respectively. However, margins were largely positive for Escort Kubota, Ashok Leyland, TVS Motor, Hero MotoCorp, and Bajaj Auto, up 279 bps, 52 bps, 97 bps, 55 bps, and 25 bps, respectively.
Q2FY26 Auto Ancillaries Review – Mixed Performance
* Financial Performance
* Steady Q2FY26 Growth In Line with Expectations: The companies under our coverage reported 14.4%/13.4% growth in Revenue/EBITDA in Q2FY26, respectively, in line with our expectations of ~13.3%/13.9% YoY. Growth was supported by higher sales volumes in 2Ws and tractors, the GST rate cut, and continued premiumization. Revenue/EBITDA rose by 5.6%/4.7% QoQ, largely in line with our estimates of 4.6%/5.2% QoQ, respectively. EBITDA performance was partly impacted by a marginal impact from commodities for some auto ancillaries. PAT grew by 14.3% YoY (our estimate:15.7%) and 4.4% QoQ (our estimate:14%).
* Mixed EBITDA Performance Across Auto Ancillaries: Endurance Technologies, UNO Minda, Sansera Engineering, CIE Automotive, and Minda Corp delivered strong YoY EBITDA growth. Meanwhile, SSWL and Automotive axle reported a 5.5%/ 6.5% YoY decline due to an unfavourable product mix.
* We expect EBITDA margins to remain largely stable in the near term, supported by a richer product mix, while raw material headwinds could exert slight pressure.
* We expect 2W sales volumes to sustain mid to high single-digit growth in FY26E, supported by new premium segment launches, an extended replacement cycle, and recovery in exports. A favourable monsoon, GST rate cut, income tax relief, and increased rural spending are likely to further drive demand for entry-level motorcycles.
* Overall PV sales growth, which has been largely led by the UV segment, is expected to remain in the mid single digits in FY26E (earlier low single digit expectations) due to the GST rate cut, which may help arrest declining entry-level PV domestic sales.
* For FY26, OEMs remain optimistic about long-term structural growth drivers, including India’s vast road network, policy measures aimed at reducing supply chain costs, the vehicle scrappage policy, reduced interest rate costs, and continued infrastructure Capex outlined in the Union Budget.
* Tractor/CV volumes are expected to grow in the high single digits in FY26E, supported by a favourable monsoon, lower financing costs, GST rate cut, and increased government allocations towards the farming/infrastructure sector before the state election.
* Auto Sector: We remain selective in our approach. Among OEMs under our coverage, our Top Conviction Ideas in 2Ws are Hero Motocorp, Bajaj Auto; in CVs is Ashok Leyland, and in the PV/tractor segment, we favour Mahindra & Mahindra (non-coverage), given its strong SUV product portfolio and leadership position in the domestic tractor industry. We recommend the “Buy On Dips” Strategy for TVS Motors and Maruti Suzuki Ltd.
* Auto Ancillaries: In the long run, product premiumization, strong order books, growing exports, GST rate cut, and the shift toward EVs are expected to drive higher content per vehicle, boosting profitability. Considering current valuations, our top conviction picks in the ancillary space are Sansera Engineering Ltd. We also suggest a "Buy on Dips" approach for Endurance Technologies and UNO Minda for long-term gains.
