It further noted that EBITDA margins expanded by 315 bps YoY due to higher ASPs (led by product premiumization) and higher operating leverage, led by higher sales volumes and softer raw input costs. “Except for Escorts, all other companies under our coverage largely matched or beat our estimates,” the brokerage stated.
Meanwhile, for the auto ancillary space, the brokerage informed that the companies under its coverage reported revenue, EBITDA and PAT growth of 12 percent, 18 percent and 18 percent YoY, respectively, driven by higher ASPs, sales volumes and operating leverage . “All companies under our coverage reported in-line EBITDA or beat on EBITDA, except for a miss for Endurance Technologies and CIE Automotive,” Axis added.
Auto Sector: An Outlook
Going forward, the brokerage expects EBITDA margins to remain stable or even improve going forward. This will be driven by a richer product mix, higher realization and positive operating leverage. However, the raw material tailwind could gradually decrease, as price gains have already gained in Q1 / Q2FY24 for some companies.
Axis continues to have a positive outlook on the sector as demand drivers remain intact. However, given the recent rally in stocks, valuations are not very attractive. Against this backdrop, it recommends the “Buy on Dips” strategy for quality stocks.
It expects 2W sales volumes to continue in FY24, which will be led by new vehicle launches (especially in the premium category), extended replacement demand supported by the Indian growth story, and an expected revival in exports in H2FY24. Furthermore, it expects the premiumization trend to continue in FY24/25.
“PV sales will be driven by the strong UV order book. However, we expect the growth rate to moderate in FY24 after strong growth of 27 percent YoY in FY23. A long CV cycle is expected by various OEMs due to increased spending on infrastructure from the government.Tractor volumes may see marginal low single digit growth/decline on FY23’s high base due to deficient and uneven rainfall.We remain selective and for OEMs under our coverage, our top picks are TVS Motor in the 2W segment, Maruti in the PV segment, and Ashok Leyland in the CV space,” Axis further stated.
For Auto Ancillaries, it noted that upgrading and focusing on EVs will drive higher content per vehicle, which in turn will drive profitability. “Our Top Sector Ideas in the Ancilla space are – CIE Automotive Ltd.; Steel Strip Wheels.”
Main Sector Ideas: Automotive
Maruti Suzuki: The brokerage has a ‘buy’ call on the stock with a target price of ₹11,800, indicating an increase of over 12 per cent.
“The company’s EBITDA margins were impressive at 12.9%, a 165bps beat against our estimates in Q2FY24, led by a confluence of positive factors. Higher volumes, sales mix, FX gain and fall in RM costs drove the beat. We expect margins to remain elevated YoY in the coming quarters due to soft RM prices, likely FX gain and sales mix. With the easing of semiconductor shortages, backlog at the end of Q2FY24 decreased to around 2.88 Lc units (3.55 Lc units ).as of the end of Q1FY24) and further corrected to around 2.5 Lc units.The higher share of premium MPV/SUVs in the sales mix will drive the growth in Revenue/EBITDA/PAT in FY23-26E.We forecast Revenue /EBITDA/PAT CAGR of 14% / 20% / 19% over FY23-26E Decline in entry-level cars is a key risk for the stock,” the brokerage said.
Ashok Leyland: The brokerage has a ‘buy’ call on the stock with a target price of ₹205, indicating an increase of 15 per cent.
“AL reiterated its earlier industry growth guidance of 8%-10% YoY for MHCV. AL’s addressable LCV industry grew at 3% YoY in H1FY24 at a slower pace than the earlier full-year guidance of 4%-5 % YoY for FY24E. . LCV growth is expected to pick up in the medium to long term. Momentum in the overall CV industry growth is expected to continue in FY25 as well, thanks to favorable industrial activity, strong replacement demand and robust government Capex spending. AL reported 11.2% EBITDA margins in Q2FY24 and has a mid-teens target of EBITDA margins over the medium term.We expect the margin performance to continue going forward due to i) Declining commodity prices, ii) Improving net realizations and lower discounts, iii ) Cost reduction initiatives undertaken by the company, iv) Operating leverage driven by absolute volume growth, and v) Growth in International Trade, Defense, Power Solutions and Aftermarket contributing to higher margins,” the brokerage explained.
TVS Motor: The brokerage has a ‘buy’ call on the stock with a target price of ₹2,100, indicating an increase of nearly 21 per cent.
“TVSL’s EV market share in H1FY24 stood at 20%, which was higher than its 16% market share in the ICE segment. We continue to like TVSL given its strong focus on the EV product pipeline ahead of current 2W OEMs etc., product premiumization in the ICE category, and growth in export markets. Moderate pricing with RM tailwinds are expected to continue for H2FY24. Moreover, as the company builds scale in EV volumes, margins from EVs will help in overall margin improvement going forward. Multiple new products are expected to be launched over the next 2-3 years targeted at 2W segments such as premium, sports, commuter, delivery and e3Ws,” stated Axis.
Top Sector Ideas: Auto Helpers
CIE Automobile: The brokerage has a ‘buy’ call on the stock with a target price of ₹585, indicating an increase of 20 per cent.
“Management has indicated improvement in CY24 across segments and across customers, along with the addition of EV business (which forms 10% of the order book). We expect 9% CAGR revenue growth over CY22-25E in its Indian operations. The management also informed that new orders in EVs (74% in PV and 50% in Metalcastello) should increase in CY24E and beyond,” it noted.
Steel Strips Wheels: The brokerage has a ‘buy’ call on the stock with a target price of ₹325, indicating an increase of 14 percent.
“The export revenue guidance currently stands ₹500-600 Cr in FY24, which stands significantly more than the affected base of ₹292 Cr in FY23. Export volume in H1FY24 at 21 Lc units has already exceeded full year volumes of FY23 by a significant 40 percent, indicating the desired recovery in the export market. Total export sales in H1FY24 stood at ₹331 Cr, inclusive ₹39 Cr from the alloy wheels segment. SSWL expects additional demand from International OEMs in FY25E to further help the company’s export growth up to 15% YoY. The company also shared that supplies to 2W EV OEMs have started from Chennai and Dappar plants; having gained 50% market share in the Rear-wheel drive segment,” stated the brokerage.
Disclaimer: The opinions and recommendations made above are those of individual analysts or trading companies, and not of Mint. We advise investors to check with certified experts before making any investment decision.
Milestone Warning!Livemint tops charts as the fastest growing news site in the world 🌏 Click here to know more
Catch all Business News, Market News, Breaking News and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More or less
Updated: 23 Nov 2023, 14:50 IST