Automobile sector earnings for the April-June quarter of FY25 was largely in-line with Street estimates with over 11% year-on-year (YoY) revenue growth (ex Tata Motors), led by a combination of volume and average selling price (ASP) growth.
Operating margins of auto companies expanded by 190 bps YoY and 40 bps sequentially at 14.6% for OEM coverage universe of Yes Securities (ex Tata Motors) and by 150 bp YoY at 14.5% (including Tata Motors).
“Going forward, given stable to marginal increase in raw material basket, gross margins are expected to remain flat to marginal negative, while price hike impact to come through for full quarter and favorable product mix in 2QFY25E,” Yes Securities said in a report.
The demand outlook remains positive for two-wheelers with FY25E with most OEMs and component suppliers indicating high single to double digit growth. This will be partly driven by low base and signs of rural demand coming back with urban markets continuing to maintain the momentum. Moreover, a likely normal monsoon is to further boost sentiments around the festive season.
However, according to the brokerage firm, the growth for Passenger Vehicle (PV) and Commercial Vehicle (CV) segments have started to moderate with flat to mid-single digit growth expected.
On the other hand, tractor volumes are expected to grow mid-single digit due to normal monsoon to help alleviate concerns around declining water levels in key west/south markets.
“The key volumes influencing factors ahead would be 1) impending rural recovery (especially entry segment which is under pressure), 2) new products launch (especially in PV and 2Ws) and 3) vehicle scrappage if made mandatory. We expect the 2Ws industry to grow ~8-10% YoY, PV +6% YoY, CV at flat to +3% YoY and tractors at flat to +5% YoY for FY25E,” Yes Securities said.
Yes Securities said it prefers two-wheelers over four-wheelers on improving demand from rural markets leading to broad based domestic recovery while current exports weakness to bottom out. It expects the CV, PV and Tractor cycle to moderate in FY25E.
Top stock picks in the Auto sector by Yes Securities are Tata Motors, TVS Motor Company, Eicher Motors among OEMs. In auto ancillaries, the brokerage firm likes Samvardhana Motherson International and Endurance Technologies.
Eicher Motors | Buy | Target Price: ₹5,307
Tata Motors | Add | Target Price: ₹1,240
Mahindra & Mahindra | Add | Target Price: ₹3,404
Maruti Suzuki | Add | Target Price: ₹14,682
Ashok Leyland | Add | Target Price: ₹271
Hero MotoCorp | Add | Target Price: ₹5,821
Bajaj Auto | Add | Target Price: ₹10,532
TVS Motor Company | Add | Target Price: ₹2,706
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
