Demand Woes to Drag Automakers’ Q3, Promotional Spending Takes a Toll on Margins

Auto Q3: Hopes for a robust revival in the performance of the auto sector seem to fade. Despite a strong festive season, D-Street analysts believe the sector might not be out of the woods just yet, as sluggish demand continues to weigh on performance.

In the second half of 2024, inventory levels had reached a record high, which eventually pushed major auto players like Maruti Suzuki and Mahindra to push out discounts. Higher sales and marketing expenses further took a toll on the overall margins.

While January saw several automakers implementing a price hike on their models due to rising input costs, a significant portion of these additional expenses was absorbed by the manufacturers themselves.

For instance, Mahindra stated in a release last month that the company "has made efforts to absorb as much of these additional costs as possible. However, a portion of this increase will need to be passed on to customers."

As for the upcoming quarterly results, concerns around demand continue to cast a shadow over investor sentiment.

According to a report by Elara Capital, 17 out of 21 companies in its auto sector analysis are expected to see a drop in margins compared to last year, and 13 of them may also report a decline from the previous quarter.

Any bright spots?

Definitely not in the passenger vehicle (PV) and Commercial vehicle (CV) segment. Even the performance of 2-wheeler space, which witnessed robust demand in the festive season, is likely to hit a low gear.

"The four listed 2W Original equipment manufacturers (OEMs) have posted flat growth year-on-year in domestic 2W sales in Q3 (vs 15% growth in H1). The only silver lining for 2W OEMs has been that exports are now seeing a gradual recovery in key markets, including Africa," Motilal Oswal said in its report.

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As for auto ancillaries, the quarterly outlook doesn't look good either because of the demand play, especially in the PV segment. Elara Capital is expecting year-on-year Ebitda margins to shrink by 100 basis points. Plus, tyre companies are also experiencing margin pressure owing to rising rubber prices. While this surge had majorly occurred in Q2, its spillover effects are expected to continue into Q3.

However, the tractor segment is likely to perform relatively better, with stronger margins and growth play. This is mainly due to a favorable monsoon which might boost rural demand.

"We remain cautious as regards the CV industry in FY25E and FY26E, while tractors may grow 7% in FY25E. Our top picks in the space are TVS Motor, Mahindra and Mahindra, Maruti Suzuki and Bajaj Auto," the brokerage house stated in its report.

What’s in Store for Q3?

Axis Securities expects the OEM sector's revenue, Ebitda, and PAT to grow by 12.7%, 10.3% and 10.6% year-on-year, respectively, alongside a 30 basis points decline in Ebitda margins.

The growth picture is anticipated to be driven by the performance of 2W and tractor segments, which should see high single-digit volume growth. PV sales should see modest growth in the low to mid-single digits, but a dip in CV sales might take some of the shine off, according to the brokerage house.

While the growth pace of CVs is expected to be slow, PVs are likely to follow a similar trend in the upcoming quarter, mainly due to the increased sales figure last year which created a higher base effect.

For D-Street investors, the upcoming quarter will be a major watch as Nifty Auto, despite delivering robust returns of around 24% on annual basis, has slipped nearly 10% over the past six months. Major auto stocks like Maruti Suzuki, TVS Motors and Bajaj Auto have been among the worst hit.

Analysts believe that the launch of new models, especially SUVs, should help boost growth in the PV segment. However, the outlook for entry-level vehicles remains challenging as the demand play continues to be weak.

Eicher Motors, Maruti Suzuki and Mahindra and Mahindra are among the top picks of analysts ahead of the Q3 results.