Indian automobile companies are set to see a further improvement in margins during the first quarter of FY24, driven by the benefits of operating leverage.
The auto index has significantly outperformed the headline Nifty this year, with a remarkable surge of 24 percent compared to the Nifty's 8 percent growth. This performance is primarily attributed to the recovery in volumes and strong margins that have propelled the stocks in the auto sector.
Looking ahead, several key companies in the Indian auto sector, including Ashok Leyland, TVS Motor, Maruti, and Tata Motors, are expected to report their earnings for Q1FY24 in July.
How will Q1FY24 be for the auto companies?
Brokerage firm Jeffries is expecting the quarter one aggregate revenues to rise 16 percent year-on-year (YoY), boosted by higher prices that the companies have opted for.
Passenger vehicles and two-wheeler wholesales grew about 9-11 percent YoY in quarter one, which was a good sign. However, truck and tractor wholesales declined about 1-7 percent — so that was one pocket that didn't look very good.
Motilal Oswal, another brokerage firm, pointed out that exports for the sector appear to have bottomed out and are on the path to recovery.
"All the players will see a very phenomenal margin improvement for the simple reason that for the last few quarters we have been seeing raw material decline. Most of the key raw materials have declined anywhere between 5-22 percent on a YoY basis. So on a YoY basis you will see all players reporting very healthy margins, but on a sequential basis, you will see players like two-wheelers or even passenger vehicles report the margin improvement on the relative basis," said Aniket Mhatre, Instl Research Analyst at HDFC Securities.
One of the most significant positive trends in the sector is the continuous margin improvement. EBITDA margins are expected to improve for the fifth consecutive quarter in the auto universe, with aggregate EBITDA predicted to rise by an impressive 49 percent YoY.
What about individual companies?
Taking a closer look at individual companies, Tata Motors stood out as the biggest gainer in the auto sector this year.
The company is expected to report its third consecutive quarter of consolidated profit. Additionally, Tata Motors has guided for Jaguar Land Rover's free cash flow to exceed 400 million pounds in Q1FY24.
Mahindra and Mahindra (M&M) also has a positive outlook, with very strong volume growth in the auto segment, driven by improvements in the supply chain and stable tractor volumes YoY. Morgan Stanley predicted that M&M is likely to experience the sharpest margin expansion among all four-wheeler players.
Also read: Auto, IT, EV — Indian market shows discipline amidst US market volatility, says Samir Arora
(Edited by : HSqukdTqAk)
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