Better product lineup could help auto firms thrive

This trend will be particularly visible in the passenger vehicle (PV) and commercial vehicle (CV) segments. In PV, there has been a shift in demand to higher margin products such as utility vehicles. In fact, this has prompted Maruti Suzuki India Ltd to launch a Sport Utility Vehicle (SUV) – the Grand Vitara and the new Brezza in FY23. The volume share of utility vehicles in its domestic PVs in Q4FY23 stood at around 25% for Maruti versus 19% a year ago.

In the CV segment, Q4 volumes got a boost due to pre-buying in anticipation of a price hike ahead of the transition to Bharat Stage VI Phase 2 norms. In addition, a mix of high margin medium and heavy CVs is on the rise. The share of such CVs in companies such as Ashok Leyland Ltd and Tata Motors Ltd increased by 300-315 basis points sequentially in Q4. The EBITDA margin of both the companies in the CV segment is expected to cross the 10% mark in Q4 from 8-9% in Q3.

In the case of Mahindra & Mahindra Ltd., the auto segment showed good volumes in Q4. But this was offset by a sequential decline in volumes in the higher margin tractor segment due to weather. This weak mix will weigh on margins, although year-on-year performance is expected to be healthy.

For two-wheelers, the high-margin export market remains a cause for concern. This will adversely affect Bajaj Auto Ltd., but the rising share of three-wheelers will provide some relief. Apart from the impact of exports, the rising share of electric vehicles (EVs) will drag down TVS Motor Company Ltd’s margins. Hero MotoCorp Ltd. will benefit from operating leverage and value addition.

Going forward, it is important to watch the margin trajectory. As shown in the chart, prices of key commodities such as steel and aluminum were marginally up in Q4FY23 and hence some cost inflation may be seen in Q1FY24. However, this pressure may not be severe as most of the automakers have accepted the price hike. But a sharp rise in commodity prices will spoil the game.

In addition, Prabhudas Lilladher analyst Himanshu Singh said, “PV companies will continue to see a richer product mix, but the pace of differentiation between SUVs and cars will slow.” Volume and support margin Therefore, what company management says about the demand environment will be important, especially in PV where moderation is indicated.

“Our dealer surveys indicate that the flow of new orders at PV dealerships has slowed down. Analysts at Nomura Financial Advisory & Securities (India) said in a report on April 11, “With supply chains normalizing across most OEMs, inventories should normalize by June and advertising and promotional spend may start picking up from Q2FY24. ” do good; Hence, a strong model cycle will be crucial to gain market share, he added.

In two-wheelers, demand conditions in export markets and EV strategies are critical. Also, how rural demand holds up given the uncertainty of the monsoon this year, remains to be seen. Surely the troubles of the auto sector are gradually reducing. This is reflected in the 21.5% rise in the Nifty Auto index in the last one year. Further upside will depend on consistent volume performance and margin improvement.

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