Demand state of affairs in Q1Fy23
Demand state of affairs throughout segments within the auto house elevated sequentially regardless of a seasonally weak quarter. This consists of traction seen even within the case of M&HCVs. This in actual fact aided working leverage.
Gross margin reversal anticipated from Q2Fy23
Gross margins for the sector took successful particularly for the 4W OEMs owing to the height prices of enter commodities. Consequently EBITDA margin noticed a squeeze for the entire 4W OEMs sequentially. Additionally, 2W firms retained their margin QoQ. “Uncooked
materials basket (RMB) prices have largely stabilised in Q2 publish round 15-20% decline in Could-June from its March-April highs. Thus gradual value hikes in Q2 and lagged impact of reducing of RMB prices would begin aiding gross margin reversal from Q2, with a gradual scale. We count on retail demand in Q2 to stay regular throughout segments QoQ, with weak-seasonality-impacted volumes in July/August to get mitigated by robust demand within the pre-festive month of September”, notes the brokerage.
“We consider, Maruti Suzuki, Bajaj Auto, TVS
Motors, and Eicher Motors would additionally profit from the beneficial foreign money strikes in previous three months, aiding their margins in Q2. In Q1, 2W EBITDAM remained flat QoQ vs 4W margin falling by round 300bps”, provides the brokerage.
Anticipate wholesales to stay largely flat QoQ in Q2 with a powerful September to compensate a weak July
With chip provide enhancing, stock ranges being beneath management and range-bound retail demand within the seasonally weak months of June- August, we count on a powerful September would hold QoQ wholesale volumes flat. With the premiumisation pattern persevering with pushed by recent SUVs and 350cc bike launches attracting sturdy demand, we concur with the patron confidence issue pushed retail demand within the private mobility segments of PV/2Ws.
M&HCV retails continued to indicate immense resilience within the wet season, clocking weekly ranges of
round 5.5k models, aided by bus demand regularly recovering publish covid. The comforting issue is that seller stock ranges throughout segments are fairly beneath management, with scope for pre-festive stocking up in coming weeks.
Valuations and danger: With auto index outperforming by ~18% in CY22-TD, valuation multiples of a number of auto OEMs have reached upcycle ranges, leaving little scope for additional rerating past our implied goal multiples. With restricted triggers for additional
earnings upgrades and rerating, we downgrade Bajaj Auto to REDUCE (from Maintain) and Eicher Motors to ADD (from Purchase).
Key upside dangers
Increased than anticipated decline in enter commodity costs, crude oil value falling under US&greenback;80/bbl, rural consumption pattern recovering.
Key draw back dangers
Continued strain on semiconductor chip provide, geopolitical scenario worsening, enter commodity costs
inching up once more, crude oil costs going again above US&greenback;120/bbl.
Auto shares outlook
Inventory | Ranking | Ranking change | Value goal | LTP as on August 25, 2022 |
---|---|---|---|---|
Bajaj Auto | Cut back | Downgrade | 3863 | 4063 |
Eicher Motors | Add | Downgrade | 3795 | 3481 |
Hero Motocorp | Add | No change | 3101 | 2800 |
TVS Motors | Purchase | No change | 1093 | 949 |
Maruti | Purchase | No change | 10042 | 8736 |
M&M | Maintain | No change | 1245 | 1260 |
Tata Motors | Purchase | No change | 646 | 459 |
Ashok Leyland | Purchase | No change | 183 | 148 |
Disclaimer
The inventory suggestions on the auto scrips are as taken from the sector replace report by ICICI Securities. Readers shouldn’t misread the report as an funding recommendation into the above shares.