The June quarter (Q1FY23) will be the first normal for Indian automakers after two years. But, that doesn’t mean that investors can expect great earnings for the quarter from the companies. Higher costs of commodities like steel, aluminum and precious metals are likely to reduce margins. Price hikes by companies can partially compensate for this.
Kotak Institutional Equities expects Q1 gross margins of most automakers to decline 50-80 basis points (bps) sequentially. One basis point is 0.01%.
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There will also be a seasonal impact on revenue performance sequentially. In the two-wheeler segment, the wedding season in the last quarter drove volume growth, which should help with revenues. For example, Hero MotoCorp Ltd’s volumes grew 17% quarter-on-quarter in the first quarter.
On the other hand, the commercial vehicle (CV) segment suffered the brunt of seasonality as the onset of monsoon brings a halt to infrastructure activities. This is evidenced by the gradual decline in Q1 CV volumes. Ashok Leyland Ltd and Tata Motors Ltd’s Q1 volumes declined 18.6% and 15.8%, respectively, respectively. As a result, Q1 revenue and margins are expected to decline.
“We expect Ashok Leyland to report a 38% sequential decline in EBITDA (earnings before interest, taxes, depreciation and amortization), mainly due to negative operating profit, higher mix of the light commercial vehicle segment and raw material average. There is a drop in the selling price. Headwinds,” said analysts at Kotak in a report on July 5.
But, as the chart shows, Q1FY23 volumes of CV manufacturers were higher as compared to Q1FY20, indicating stronger demand momentum. Note that it would not be fair to compare with Q1FY21/FY22, as these quarters were affected by the first and second wave of COVID, respectively. While Mahindra & Mahindra Ltd.’s CV volumes were up 14.3% in Q1FY23 as compared to Q1FY20 levels, Tata Motors and Ashok Leyland’s volumes were up marginally.
Coming to passenger vehicles, the segment’s sales volume declined sequentially due to supply chain constraints. The lockdown in China will impact sales of Tata Motors’ UK-based subsidiary Jaguar Land Rover Automation Plc and may impact Tata Motors’ consolidated revenue.
However, supply chain conditions are expected to ease. Analysts do not anticipate a further incremental impact from geopolitical tensions and China’s lockdown. “This should help in operating profit in passenger vehicles/commercial vehicles, with significant ramp-up expected in premium variants,” analysts at Yes Securities (India) said in a report on July 6.
The outlook for margins is also improving. Margins are expected to increase in Q2 of FY13, with improvement in steel and aluminum prices. For perspective, as per Steelmint, the price of domestic hot rolled coil was Rs 59,800 per tonne on July 6. This is 21% lower than the average seen in April.
Kotak analysts are of the view that since there is no price hike, the automakers expect gross margins to rise 100-200 bps sequentially in the second quarter.
As such, the demand position remains strong across all sectors.
“The auto industry is coming out of recession after three years. Two-wheeler sales are increasing sequentially and are expected to maintain momentum in view of higher kharif sowing expectations. Demand in the passenger vehicle segment is strong and with easing of supply chain issues, volumes are expected to improve,” said Varun Baxi, analyst at Nirmal Bang Equities. Further, growth in infrastructure activity bodes well for the commercial vehicle segment. signals from.
The Nifty Auto index reflects this optimism, having appreciated over 10% so far in CY22, making it the top gainer in the sectoral index of the NSE.