Automobiles Q3 Preview - Gross Margin To Contract Sequentially As Raw Material Prices Inch Up: Motilal Oswal

Motilal Oswal Report

The third quarter witnessed healthy demand across the segments, as volumes are expected to grow 18% YoY. The two-wheelers outperformed other segments and is likely to rise ~20% YoY. Volumes for three-wheelers, passenger vehicle, and commercial vehicle are likely to improve ~15%, 12%, and 3% YoY, respectively, while the same should decline 4% YoY for tractors.

Overall exports are anticipated to recover gradually as the supply chain situation improves further, followed by improving macro outlook in key geographies.

Commodity prices have remained favorable over the last few quarters. Inflationary pressures peaked in Q3 FY23, following which, prices corrected for most of the commodities. Despite a slight increase in some of the taw material prices sequentially, we expect gross margin to improve ~100 basis points YoY for our original equipment manufacturer coverage universe in Q3 FY24.

We estimate Ebitda margin to improve YoY for the seventh successive quarter, with a 160 bp YoY gain (+40 bp QoQ) for our auto OEM Universe (excluding Jaguar Land Rover). This will be driven by better gross margin, cost efficiencies, and operating leverage. The benefit of healthy growth in underlying industries coupled with cost efficiencies should also result in strong earnings growth for our ancillary coverage during the quarter. 

There has not been any material change in the FY24 earnings estimate for our coverage universe. We are already witnessing a reversal in demand patterns, especially in the two-wheelers, wherein we anticipate a high growth potential.

As compared to other categories, two-wheelers have a relatively better scope for growth over FY23-26E. On the other hand, we turn cautious about the passenger vehicle growth outlook due to a slowdown in demand trends and a high base.

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