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MOSL:AUTOMOBILES | 1QFY23 PREVIEW: Demand recovery underway, supply side issues easing up; 1QFY23 will see cost inflation, but expect relief from 2QFY23 onwards

- Volumes in 1QFY23 recovered across segments on low base of 1QFY22, supported by some improvement in the supply of semi-conductors. Demand momentum sustained in PVs and CVs, while 2Ws and tractors witnessed some signs of recovery.
- The wholesale volumes for PVs grew 22% YoY (-12% QoQ), CVs grew +105% YoY (-10% QoQ), 2Ws grew 25% YoY (flat QoQ) and tractors grew 16% YoY (+49% QoQ).
- After the last three quarters of YoY decline in EBITDA margins, we estimate margins to improve on YoY basis by 140bp (-90bp QoQ) for MOFSL Auto OEM universe, driven by operating leverage, despite increase in RM cost (+140bp YoY, +40bp QoQ). Except HMCL and MM, all other OEMs are likely to report QoQ erosion in margins.
- We revise our FY23E EPS estimates for select companies for it to reflect a) commodity price/Fx changes, b) weakness in EU markets, and c) increase in interest rates. We lower our FY23 estimates for TTMT (-12%), CEAT/APTY (-9%), and ENDU (-6%). We raise our estimates for HMCL (+10%), TVSL (7%), and MM/EIM (+5.5%).

Demand recovery getting broad based; Supply side issues easing
Volumes in 1QFY23 recovered across segments on low base of 1QFY22, supported by some improvement in the supply of semi-conductors. While demand momentum sustained in PVs and CVs, 2Ws and tractors witnessed some signs of recovery. The wholesale volumes for PVs grew 22% YoY (-12% QoQ), CVs grew +105% YoY (-10% QoQ), 2Ws grew 25% YoY (flat QoQ), and tractors grew 16% YoY (+49% QoQ). 2Ws and tractors have witnessed QoQ improvement in volumes as OEMs were focused on inventory correction in 4QFY22. On the other hand, M&HCV volumes were relatively strong for a seasonally weak quarter.

EBITDA margins to improve on YoY basis, driven by operating leverage
After the last three quarters of YoY decline in EBITDA margins, we estimate margins to improve 140bp YoY (-90bp QoQ) for MOFSL Auto OEM universe, driven by operating leverage, despite increase in RM cost (+140bp YoY, +40bp QoQ). Except HMCL and MM, all other OEMs are likely to report QoQ erosion in margins. 1QFY23 will see increase in commodity cost on account of steel prices (negotiations are on-going) and crude derivatives, diluted by some softening in other commodities as well price hikes take by the OEMs.

Headwinds are receding, some tailwinds emerging
After operating in the head-winded environment for the last three-four years, we are witnessing signs of some emerging tailwinds. While demand recovery is expected to sustain on a low base, commodity prices have started to moderate, though the benefit might come with a lag. Although fuel prices have moderated from the peak levels, increase in interest rates could have some impact on demand. While we expect 2W/PV/Tractor volumes to register 9.6%/13.5%/7% CAGRs over FY22-25E, 3Ws/LCVs/ M&HCVs is expected to register 10%/17%/21%.