Motilal Oswal Financial Services, a domestic brokerage, reported in its Q2 results review that margin tailwinds led to a strong performance across various sectors, ending 2QFY24 on a positive note. The outperformance was driven by domestic cyclical sectors such as cement, automobiles, banking, financial services, and insurance.
The auto industry experienced a significant year-on-year growth of 112%, surpassing expectations, with companies like Mahindra & Mahindra, Maruti Suzuki, and Tata Motors leading the way. The brokerage noted upgrades for FY24E to incorporate improved gross margins and cost efficiencies, supporting overall profitability.
Despite an inventory buildup for the festive period last year, auto volumes in 2QFY24 remained flat year-over-year. Strong growth in MHCVs, SUV demand, and early recovery in 2Ws were key drivers of this performance.
Wholesales for 3W/PV/CV increased by around 11%/6%/4% YoY, while tractors/2Ws/LCVs saw a decrease of 4%/3%/1% YoY. The volume of MHCV increased by approximately 15% YoY. Exports and domestic volume saw a 6% and 2% decline, respectively, in the second quarter. Price increases and volume growth contributed to a 15% YoY increase in total revenue for the brokerage’s Auto Universe.
Foreign exchange benefits, operating leverage, and decreasing inflation in commodity costs drove EBITDA’s 42% YoY growth, with quarterly adjusted PAT increasing by 59% YoY. Looking ahead, the brokerage expects 2HFY24 to outperform 1H based on festive volumes, stable macro outlook, and increased demand in various segments.
Gross margins for Auto OEMs improved by 420 basis points YoY to 28.7%, reflecting the benefits of lower raw material costs. EBITDA margin increased by 240bp YoY to 12.3%, supported by efficiencies and FX benefits. The brokerage believes that the full benefits of low raw material costs were seen in 2QFY24, with slight increases in metal prices expected in 3QFY24.
Exports faced headwinds in the second quarter, but a gradual recovery is anticipated in 2HFY24. The brokerage prefers 2Ws and CVs within the sector, with a positive outlook on demand in the 2W segment. Tata Motors and Hero MotoCorp are top OEM picks, while Endurance Technologies and Craftsman Automation are favored among auto component stocks.