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MOSL:AUTOMOBILES | 2QFY23 PREVIEW: Chip supplies easing, festive season critical for 2Ws and Tractors

Automobiles | 2QFY23 PREVIEW: Chip supplies easing, festive season critical for 2Ws and Tractors

• Volumes in 2QFY23 recovered across segments on a low base of 2QFY22, aided by some improvement in semiconductor supplies. Wholesale volumes for PVs grew 25% YoY and 5% QoQ, CVs grew 37% YoY and 7% QoQ, 2Ws grew 5% YoY and 12.5% QoQ, and Tractors grew 7% YoY (but fell 15% QoQ).
• For the second quarter in a row, we expect EBITDA margin to improve by 310bp YoY and 130bp QoQ for MOFSL’s Auto OEM Universe, led by price hikes and operating leverage, despite the residual impact of an increase in RM cost. Except HMCL and MM, all other OEMs are likely to report a YoY improvement in margin (a QoQ improvement for all OEMs).
• We expect a 12%/22%/7%/14%/19%/26% volume CAGR (FY22-24E) for 2Ws/ PVs/ Tractors/3Ws/LCVs/M&HCVs.
• We revise our FY23 EPS estimate for select companies to reflect: a) forex and commodity price-related changes, b) weakness in export markets, and c) an increase in interest rates. We lower our FY23 estimate for TTMT (-20%), MOTHERSO (-13%), and HMCL (-5%). There are no major upgrades to our EPS estimates for FY23.

 

Supply-side issues easing, festive season critical for 2Ws and Tractors

Volumes in 2QFY23 recovered across segments on a low base of 2QFY22, aided by some improvement in semiconductor supplies. The demand momentum sustained in PVs and CVs, while 2Ws and Tractors saw some signs of a recovery. Wholesale volumes for PVs grew 25% YoY and 5% QoQ, CVs grew 37% YoY and 7% QoQ, 2Ws grew 5% YoY and 12.5% QoQ, and Tractors grew 7% YoY (but fell 15% QoQ). Tractor is the only segment to witness a QoQ drop in volumes as OEMs were focused on inventory correction in 1QFY23. Exports overall have been under pressure for OEMs as well as Auto Component suppliers due to various frictions in the global trade.

 

Price hikes and operating leverage to drive margin improvement despite cost inflation

For the second quarter in a row, we expect EBITDA margin to improve by 310bp YoY and 130bp QoQ for MOFSL’s Auto OEM Universe, led by price hikes and operating leverage, despite the residual impact of an increase in RM cost. Except HMCL and MM, all other OEMs are likely to report a YoY margin improvement (QoQ improvement for all OEMs). 2QFY23 will see an increase in commodity costs on account of the lag impact of steel price and crude derivatives. The same was more than offset by some softening in other commodities and price hikes, resulting in a gross margin expansion of 50bp YoY and 90bp QoQ.

Some major headwinds recede, but new ones emerge

After operating through several headwinds in the last three-to-four years, some of these headwinds are turning into tailwinds. While demand recovery is expected to sustain on a low base, commodity prices have started to moderate, with benefits expected to accrue from 3QFY23. Increase in interest and weakening global macros can be an emerging concern for demand. We expect a 12%/22%/7% volume CAGR (FY22-24) for 2Ws/PVs/Tractors. For 3Ws/LCVs/M&HCVs, we expect a volume CAGR of 14%/19%/26% over FY22-24.