The fourth quarter earnings season began this week, with IT heavyweights Tata Consultancy Services (TCS) and Infosys releasing their financial performance figures for March quarter of 2022 (Q4FY23). Maruti Suzuki India, the country’s largest auto company by market capitalisation, is scheduled to release its financial results on April 26, followed by other players such as Tata Motors, Mahindra and Mahindra, Hero MotoCorp, Ashok Leyland, and many more.
According to Axis Securities, both auto original equipment manufacturers (OEMs), especially commercial vehicles (CVs) and passenger vehicles (PVs), and ancillary companies, are expected to witness slight improvement in gross margins in March quarter as the benefit of the drop in commodity prices during Q3FY23 trickles down in Q4FY23, albeit with a lag. In Q3FY23, steel HRC (hot-rolled coil) prices have corrected by 5% QoQ while Aluminum was down 1% QoQ. However, Copper was up 3% on a QoQ basis.
The brokerage expects revenue of auto OEMs to grow at 19% year-on-year (YoY) in Q4FY23, while it is projected to register a growth of 8% in sequential basis. The profit after tax (PAT) and EBITDA of auto OEMs are seen growing by 29% YoY and 11% QoQ, led by double-digit volume growth in the PV and CV segment, though this will be partially offset by lower two-wheeler sales on account of lower exports. EBITDA margins are expected to expand both YoY/QoQ due to a richer product mix, absorption of price hikes, and marginally lower RM costs, it said.
In the two-wheeler segment, QoQ revenue growth is expected to remain flat for TVS and Eicher Motors (RE) led by de-growth of 1.3% each in sales volumes. Bajaj’s revenue is expected to fall by 10% QoQ on the account of lower sales volumes (down 13% QoQ) due to weaker exports. Hero Motocorp is the only standout in the two-wheeler space, with revenue expected to grow by 5%, led by slightly higher sales (up 3% QoQ), the agency said in its report.
In tractors, Escorts revenue is expected to fall by 4% QoQ due to lower tractor sales QoQ (down 12% QoQ).
In its Q4 preview for auto sector, Axis Securities projected Maruti Suzuki India to report revenue growth of 12% quarter-on-quarter (QoQ) led by higher sales and higher average selling price (ASP) QoQ (up 1%) led by a price hike of 1.1% taken in mid Jan'23. The YoY growth is projected to exceed the sales volume growth led by a higher share of SUVs in the product mix (20.6% in Q4FY23 vs. 15.7% in Q4FY22). The sales volume is likely to increase by 5% YoY and 11% QoQ, led by higher sales of the SUV segment (up 38%/10% YoY/QoQ).
The operating profit or EBITDA is expected to outpace the topline growth both on YoY and QoQ basis, led by a richer product mix (higher share of SUV) and flat RM costs. EBITDA margin is seen improving by around 130 YoY and 65bps QoQ.
Axis Securities has maintained a positive outlook on the auto sector for FY24, expecting a more challenging landscape ahead as pent-up demand of FY23 over the low base of FY22 subsides across segments. Furthermore, real-time driving emission norms (from Apr'23) and safety regulations related to six airbags from Oct’23 and higher interest rates could pose additional challenges to the auto OEMs across segments as it will further increase the cost of acquisition of vehicles, it added.
The agency said the Union Budget's thrust on infrastructure development bodes well for the CV industry, but high-interest rates and rising fuel costs may act as headwinds. It expects PV sales volumes to sustain in FY24, led by new vehicle launches, especially in the SUV category. Going ahead, the growth rate is seen moderating in FY24 in the backdrop of looming risk of El Nino which is likely to impact the monsoon as well two-wheeler and tractor sales.
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