This auto segment could outperform as Q3 results start rolling out
The auto sector has had a disappointing run and underperformed the Nifty last quarter as the benchmark index tested new highs in early December. This was due to concerns over rising inflationary pressures hurting the demand momentum.
Indeed, input prices have stayed elevated and any pickup in absolute earnings is expected to take shape from demand uptick.
Last quarter, while two-wheeler demand failed to pick up even during the festive season, passenger vehicles (PVs), tractor and commercial vehicle (CV) demand remained strong. This was supported by easing of supply chain constraints for major OEMs sequentially. Meanwhile, export demand continues to be soft due to the geopolitical tensions.
But there is some silver lining now as the auto and auto ancillaries sector is likely to benefit from softening input costs hereafter.
CV players are expected to outperform two-wheeler and car makers in terms of earnings growth last quarter. In CVs, Ashok Leyland has outperformed the industry with 5% QoQ growth in volume. This compares to a 5% QoQ decline in CV volume by Tata Motors and 2% volume growth for Volvo Eicher.
In the PV segment, M&M’s margin could improve on the back of a favourable mix and softening input costs. For Maruti Suzuki, margin is expected to remain stable as the lower volume and higher discounts could get neutralised by lower raw material cost and improved product mix.
On the flip side, weak demand will overpower the benefit of lower input cost for two-wheeler makers. Demand, especially in the entry level, remained weak during the festival season and led companies to correct their inventory.
Within listed peers, Bajaj Auto underperformed with a 17% YoY decline in unit sales while Royal Enfield grew at a fast slip, rising by 31% powered by new launches. Royal Enfield's parent company, Eicher, is likely to be the only two-wheeler player to post positive earnings growth.
Auto ancillary companies will benefit from soft input costs and lower energy costs for companies with exposure to Europe. For tyre companies, margins shall improve on a sequential basis as natural rubber price has slid 10% from the three months ended September 30 and crude oil price is also down by a similar extent.
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