Automobiles Q2 Results Preview - Four-Wheelers To See Margin Boost: HDFC Securities

HDFC Securities Institutional Equities

The auto sector has underperformed the Nifty Index over the last six months due to concerns over rising inflationary pressures hurting the demand momentum.

In this scenario, we believe companies with a strong product pipeline would be able to outperform the market and emerge as major beneficiaries of a softening commodity cycle.

Our top picks for the sector are Mahindra and Mahindra Ltd., Maruti Suzuki India Ltd. and TVS Motor Company Ltd.

In auto ancillaries, we like Bharat Forge Ltd.

Given that the festive season this time has been pushed by a month into November, Q2 volume growth appears lower YoY. In passenger vehicles, while utility vehicle demand has held up extremely well, car demand has further decelerated, driving a rich mix for most original equipment manufacturers. Commercial vehicle demand momentum continues to be healthy in Q2. However, two-wheeler demand has failed to revive even in Q2.

Two wheeler industry is estimated to decline 1% YoY in Q2. While two-wheeler exports seem to have bottomed out, recovery is likely to take a while given the adverse geopolitical trends.

Within this, the entry-level commuter segment continues to underperform as rural recovery has remained elusive. Even the tractor segment has witnessed an estimated 3% YoY decline in volumes in Q2 due to sub-par monsoon.

Auto ancillary companies set to benefit from benign input costs

For Apollo Tyres Ltd., we expect both demand and margins to largely remain stable QoQ. For Balkrishna Industries Ltd., we expect margins to improve around 140 bps QoQ, led by softening input costs and a gradual pick-up in demand QoQ over a low base.

For Endurance Technologies Ltd., we expect a 2% earnings decline QoQ due to weak demand in Europe.

For Bharat Forge, the standalone entity is expected to see margin improvement led by steady revenue growth driven by execution of its defense exports order and PV exports ramp-up. Performance of overseas subsidiaries is also expected to improve QoQ.

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