The key highlights of 1Q were: (1) OEMs-decent top-line growth, led by a richer product mix and strong demand trends for 2W, but growth moderation was seen in the PV segment, (2) diversified auto ancillaries-strong automotive volume growth, coupled with the consolidation of acquisitions (SAMIL), drove strong earnings growth, (3) tire companies-operating performance impacted due to the persistent increase in rubber prices and (4) bearing companies-mixed performance impacted by margin pressures. TTMT and M&M remain our top picks in the OEM segment, whereas we prefer SAMIL and Uno Minda in the ancillary space.
OEMs-strong operating performance; underlying demand trends weakening
Aggregate revenue of auto OEMs was up 9% yoy in 1QFY25, driven by (1) 14% yoy growth in 2W production volumes, (2) a moderate growth of 3% yoy in PV production volumes, (3) a richer product mix and (4) price hikes, which were partly offset by a 5-7% decline in MHCV and tractor volumes. The EBITDA of auto OEMs grew 21% yoy, led by an operating leverage benefit, a richer product mix and RM tailwinds. As a result, the EBITDA margin improved 140 bps yoy to 14.4%. Gross margins expanded 160 bps yoy. Overall, the adjusted PAT grew 20% yoy in 1QFY25.
Strong automotive demand aided growth for diversified auto ancillaries
Diversified auto ancillaries' revenue growth stood at 23% yoy (including SAMIL) and 12% yoy (excluding SAMIL) in 1QFY25, led by strong growth in production volumes of 2W and steady growth in the replacement segment. EBITDA (excluding SAMIL) increased 16% yoy in 1QFY25, driven by (1) operating leverage benefit and (2) a richer product mix. Gross margins expanded 240 bps yoy due to a richer product mix and softening inflation. PAT grew 38% yoy, partly driven by SAMIL's 66% yoy PAT growth.
Strong volume performance was marred by RM headwinds for tire companies
Tire companies, especially MRF, BKT and CEAT, posted strong volume growth, partly due to channel filling (BKT), but overall profitability growth was muted owing to RM headwinds and obligations pertaining to EPR. Higher competitive intensity in select segments, coupled with commodity headwinds, will weigh on domestic tire companies' profitability. Balkrishna Industries reported a strong quarter volume growth on account of channel filling, but the outlook for the global OHT segment remains weak, coupled with cost pressures.
JLR continues to outperform global luxury OEMs
The luxury passenger vehicle market declined 3% yoy, with volumes declining for most luxury brands, except for JLR, which grew 5%, despite muted demand trends due to strong demand for RR, RR Sport and Defender. The company continues to improve its profitability, with an EBIT margin improvement of 30 bps yoy in 2QCY24, led by (1) a richer product mix and (2) cost control measures. The EBIT margins of Porsche and Mercedes-Benz declined significantly by 310/350 bps yoy in 2QCY24, whereas the EBIT margins for Audi and BMW declined 50-80 bps yoy in 2QCY24.
Mixed performance across bearing companies in 1QFY25
Bearing companies' revenues grew 11% yoy, driven by (1) strong growth in the railway segment (Timken), (2) an uptick in the aftermarket division (Timken and Schaeffler) and (3) strong growth in 2W production volumes (SKF). However, the EBITDA margin of the SKF/Timken/Scheffler contracted 150/90/80 bps yoy in 1QFY25. EBITDA grew 8% yoy, whereas PAT grew 4% yoy in 1QFY25.
Softening of metal prices to aid margin expansion for OEMs from 3QFY25E
While international/domestic natural rubber prices (spot) have risen 15/47% from 4QFY24's average level, driven by persistent supply concerns and adverse weather concerns in key rubber producing countries, most metal prices (spot)-steel, aluminum, copper and precious metals-witnessed a decline of 5-9% when compared with 1QFY25's average monthly levels on account of weak offtake from China. Overall, we expect the current metal and rubber prices to sustain at current levels; there can be 25-60 bps margin expansions for OEMs and a 400 bps margin erosion for tire companies (assuming no price changes). A sharp appreciation of the Yen versus INR will result in a higher cost of imported RM, which will weigh on MSIL's profitability from 3QFY25E. |
