Auto, Auto Ancillary Q3 Results Review - Ebitda Margins Improve Across OEMs: DRChoksey

DRChoksey Research Report

Nifty Auto Index is trading at 23.2 times one-year forward price/earning versus a historical two-year average of 27.6 times and historical one-year average of 24.4 times.

The domestic two-wheeler industry is expected to see growth of 8.0% to 10.0% YoY in the coming quarters, to be led by continued growth in the 125cc+ segment and new launches. Bajaj Auto Ltd. will continue to launch products in the 125cc+ segment and there will be two-three upgrades each month for the next three-four months.

The passenger vehicle industry growth is expected to be muted in CY24E due to a high base. The discounts for PVs should reduce in Q4 FY24E due to lower inventory levels. The commercial vehicle industry will see an impact on volumes in the next two quarters due to a high base and upcoming union elections. However, the fundamental demand drivers for the CV industry have remained strong and growth along with profitability improvement is likely to continue in the medium term.

As per commentaries by original equipment manufacturers, some commodities such as steel, polypropylene, rubber, copper and zinc may see some uptick in Q4 FY24E while lower prices should continue for palladium, rhodium, etc. OEMs have continued to increase prices which will lead to realization improvement. Tata Motors Ltd. has increased its CV prices by up to 3.0% from January, 01 2024 and PV prices by 0.7% from February 01, 2024. Maruti Suzuki India Ltd. has increased its PV prices by 0.45% from January 16, 2024.

Ashok Leyland Ltd. has continued its realisation improvement journey and has raised prices in January 2024 as well. Our top picks include Ashok Leyland, Bajaj Auto and Tata Motors.

Ashok Leyland will benefit from the medium-term tailwinds for the CV industry, margin improvement from strict pricing discipline and cost rationalization, and growth in non-vehicle businesses.

WE like Bajaj Auto due to its strong growth trajectory in domestic two-wheeler and CV businesses along with ramp up in its new businesses of Chetak E-2W, E-3W and Triumph.

We like Tata Motors Ltd. as it has continued to deliver consistent improvements in the topline and profitability of all its businesses along with strengthening balance sheet as it moves towards its net zero debt target.

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