Ms. Mansi Lall - Research Associate at Prabhudas Lilladher.
- Aggregate revenues in our OEM coverage universe expected to grow by 10% QoQ led by volumes and price hikes.
- EBITDA margins excluding JLR expected to decline by ~160bps YoY (+60bps QoQ) due to RM cost pressures partly offset by price hikes.
In 4QFY22 commercial vehicle (CV) segment topped the charts with ~20% YoY volume growth, supported by pick-up in fleet utilization levels led by increased economic and infrastructural activities. Passenger vehicle (PV) segment grew ~4% YoY and is faring better than two-wheeler (2W) segment (decline of ~18% YoY), as retail demand remains strong for the former (customers' preferences for personal mobility). With semiconductor issue easing out, waiting period is ameliorating; however, impact on supplies due to Russia-Ukraine war needs to be watched out for. The non-performing 2W segment is currently impacted by rural distress and higher ownership cost amidst soaring fuel prices. However, expect rural 2W retails to witness pick-up as expectations are high for Rabi harvest, monsoons and upcoming wedding season. Tractor volumes remained weak on the back of high base, erratic monsoons and weak rural sentiments. For our OEM coverage universe, we expect EBITDA margin to expand ~60bps QoQ supported by price hikes. We expect RM headwinds to impact profitability in 1HFY23.
We remain structurally positive on CV play and expect Ashok Leyland and Tata Motors to benefit from CV recovery. Tata Motors will further benefit from strong PV volumes supported by new models, EV and recovery at JLR. Our top picks are Ashok Leyland and Tata Motors.
Demand recovery remains strong in CVs and PVs; 2W and tractor segments remain laggard: (1) CV sales are witnessing MoM improvement as MHCV segment demand is supported by increasing infrastructural activities, increasing freight availability and improving fleet utilization. LCV segment sales are benefiting from demand in CNG space, e-commerce and last mile delivery services. (2) PV sales are witnessing improvement, as OEMs have worked out alternative sources for procurement of ECUs; however, semiconductor supply still remains a challenge due to global scenario. (3) 2W and tractor sales continue to remain impacted by weak rural sentiments. Any revival in rural demand led by good Rabi harvest and monsoons will benefit retails.
Commodity inflation is a concern: Average price for aluminum has grown by ~22% over last quarter. Then prices of aluminum, lead and copper increased by 57/18/16% over last one-year. Also, ~100% QoQ increase in the lithium carbonate prices could impact demand for EVs. Recent raw material headwinds due to Russia-Ukraine war situation will likely impact margins, over next quarter as well.
EBITDA margins to expand by ~60bps QoQ (contraction of 160bps YoY): EBITDA margin is expected to remain affected by cost pressures and lower scale of operations. Among OEMs, Ashok Leyland, Tata Motors, Eicher and Maruti to witness QoQ margins expansion, led by improved sequential volumes and price hikes.
Key target price and earnings change: Across OEMs we have cut FY23/24 EPS by 5/3% to factor in RM inflation leading to margin contraction. Among ancillaries, we cut ENDU FY22/23 consol EPS by 21/16% for FY23/24 to factor in lower domestic 2W sales and weak Europe sales impacted by lockdowns. For Bharat Forge (BUY), we now value the company at 30x FY24E EPS (vs 32x earlier) to factor in weak global scenarios.
We upgrade Maruti to BUY, as the stock has corrected 15% over the last two months. The company has lost 600bps market share since FY20 (current market share 45%) due to higher competition in the SUV space and no major model launches. However, there still remains an upside for the market leader, as it will benefit from (1) several model launches/upgrades in 2022, (2) demand for CNG models (17% of overall sales) due to fuel price inflation and (3) any pick-up in the rural (~40% of sales) incomes will aid demand.
Top picks - AL and TTMT among OEMs
AL (CMP Rs 131, TP Rs 170): Recovery in CVs to continue going ahead led by (1) economic recovery benefitting demand from segments like Infra, Mining and E-com. and (2) AL de-risking MHCV through- (a) New launches in LCV to gain market share and (b) Increased focus on spares and exports business. Furthermore, with launch of CNG models we expect AL to regain part of its market share.
TTMT (CMP Rs 452, TP Rs 656): We remain positive on Tata Motors given its (1) assertive stance on EV ecosystem- company has outlined its aggressive stance for EV business with $2bn investment over next 5 years on product, platform, drive trains, technology charging infra and manufacturing (2) PV business with its SUV focused approach and new product pipeline is set to gain market share and (3) CV benefitting from cyclical upturn.