Results preview: Ebitda margins of auto cos to take the wheel in Q4, again

Analysts indicate that in future, gross margins might come under pressure

Riding on the moderation in raw material cost and favourable forex, the automotive industry’s Ebitda margins are expected to improve in Q4FY23 for the fourth quarter in a row, analysts said.

Axis Securities analysts pointed out that they expected revenues, Ebitda (earnings before interest, taxes, depreciation, and amortisation) and profit after tax (PAT) to grow by 19 per cent, 29 per cent and 29 per cent, respectively, year-on-year (YoY) in the fourth quarter.

The fourth quarter of the 2023-34 fiscal witnessed a stable demand environment, though there were signs of volume growth 

moderation in some segments. “Demand largely remained intact for M&HCVs (medium and heavy commercial vehicles), tractors and domestic two-wheelers (2W), whereas growth moderated for passenger vehicles (PV) and light commercial vehicles (LCV). Two-wheeler exports remained weak,” highlighted Motilal Oswal analysts.

“In terms of wholesale volumes, we estimate Q4FY23 volumes to grow by 11 per cent YoY for PVs, around 17 per cent for M&HCVs, around 21 per cent for tractors and around 9 per cent for three-wheelers. Two-wheeler volumes were flat YoY due to a 32 per cent decline in exports; however, domestic volumes grew 13 per cent. LCV volumes are estimated to grow by 1 per cent,” the brokerage added.

Meanwhile, raw material prices have started resurging from their lows during the quarter. Original equipment manufacturers (OEMs) have also announced fresh price hikes in response to the transition to the BS VI Stage 2 norms (starting April 2023). And semiconductor chip supply issues have also come back to haunt production planning for the coming months.

Some analysts, therefore, expect the gross margins to peak out. For example, ICICI Direct Research noted: “With majority of raw material decline benefits already accrued by OEMs in the past and tyre space set to witness already guided gross margin expansion in Q4FY23, amid a steady rise in key raw material prices, we expect gross margins to largely peak out for our universe in the current quarter (Q4FY23).” It added that on the volume front, two-wheeler market leader Hero MotoCorp’s volumes for the quarter were up 2.5 per cent sequentially. However, at the same time, Royal Enfield at Eicher Motors (premium segment player) saw a 1.3 per cent quarter-on-quarter (QoQ) decline in volumes. For Bajaj Auto, total volumes for the quarter were down 12.8 per cent QoQ at 860,000 units. “In the PV domain, total volumes at Maruti Suzuki came in at 5.1 lakh (510,000) units, up 10.5 per cent QoQ, while total automotive volumes at M&M were at 1.9 lakh (190,000) units, up 7.5 per cent QoQ,” ICICI Direct said.

In the commercial vehicles (CV) space, volumes at Ashok Leyland came in healthy at around 60,000 units, up 25.5 per cent QoQ. In the tractor space, it was a seasonally weak quarter, with sales volumes declining in double digits QoQ at both listed players.

Tata Motors is expected to report a healthy Q4FY23, primarily tracking a recovery in wholesale volumes at Jaguar Land Rover (JLR). Total sales volume in Indian operations were at 252,000 units, up 10.4 per cent QoQ, with JLR sales volume (including China JV) anticipated at 108,000 units, up 16.6 per cent QoQ, ICICI Direct said.

The sector is seeing some of the major headwinds, which it has been facing for the last 3-4 years, turn into tailwinds, analysts said. The demand recovery is expected to sustain, with the pace of growth moderating.

Motilal Oswal analysts said, “Exports seem to have largely bottomed out, but a recovery may take a couple of quarters. But new headwinds are emerging in the form of signs of demand moderation in certain segments due to higher inflation or interest rates.”