The moderating commodity costs and operating leverage are aiding the margins of automakers says a Motilal Oswal report. It says that from a demand standpoint, Q2 FY2024 was a mixed bag as passenger vehicles and commercial vehicles continued to expand YoY but two-wheelers and tractors declined.
The research agency anticipates a YoY decrease in two-wheeler volume, the domestic and export markets appear to be recovering for two-wheelers. Dispatches for SUV remained strong fuelled by order book execution and improvement in the supply chain situation. However, demand moderated for lower-end passenger vehicles. Among all the segments, M&HCV appeared to be better placed despite a drop in discounts, driven by healthy demand across most of the underlying industries.
It expects that on a YoY basis, wholesale volumes will grow around 15% for MHCV, around 11% for PV, 20% for three-wheeler,s and 1% for LCV. However, Q2 FY2024 volumes is expected to decline 2% YoY for two-wheelers and 4% YoY for tractors. The domestic two-wheeler volumes are expected to decline 3% YoY, whereas exports are likely to grow 3.5% YoY.
Motilal Oswal’s report states that it is “building estimates based on stable commodity costs; however, we expect the benefits of favorable mix/FX and operating leverage to accrue and lead to sustained margin recovery.”
The demand recovery is expected to sustain for two-, three-wheeler and M&HCV. Exports appear to have bottomed out, but broad-based recovery is not yet visible.
On the other hand, it is seeing new headwinds emerge in the form of:
- Likely demand moderation in certain segments such as PVs, LCVs and tractors due to higher inflation/interest rates.
- Global macro uncertainties that are raising concerns for players having international exposure.
However, commodity prices have been favourable since the last few quarters. After witnessing inflationary pressure from the lows of Q3 FY2023, most of the commodity prices have corrected (especially precious metals). “We expect a volume CAGR of 9-11%/5-7%/3-5% for 2W/PV/tractors over FY23-25. For 3W/LCV/MHCV, we expect a volume CAGR of 17-19%/3-5%/9-11% over FY23-25. ”
