Auto companies are likely to report healthy revenue growth for the June quarter on the back of robust volume growth across vehicle segments, but rising raw material costs and higher freight expenses are expected to weigh on margins, according to Yash Agrawal, CFA, Research Analyst at Nirmal Bang Institutional Equities.
Speaking to NDTV Profit ahead of the earnings of TVS Motor and Bajaj Auto, Agrawal said demand trends remained encouraging during the quarter, with strong double-digit volume growth across two-wheelers, three-wheelers, passenger vehicles and commercial vehicles. However, he expects profitability to come under pressure as automakers continue to grapple with cost inflation.
"Most of the players will report strong revenue, but margins, we are seeing contraction across the categories," Agrawal told NDTV Profit.
Also Read | Q1 Results Live Updates: Adani Energy Profit Rises, Bajaj Auto Beats Estimates; TVS Motor Earnings In Focus
OEM price hikes, Middle East Tension Weighing
He said calibrated price hikes undertaken by original equipment manufacturers (OEMs) have not been enough to fully offset higher raw material costs. The escalation of tensions in the Middle East has also led to higher freight costs and supply chain disruptions, adding to pressure on operating margins.
According to Agrawal, companies with a larger export business are likely to fare better during the quarter as exports support a favourable product mix and, in turn, Ebitda margins.
Among two-wheeler manufacturers, he expects Bajaj Auto and TVS Motor to be relatively better placed because of their higher export contribution.
"Apart from Bajaj Auto, even TVS Motor, because of the higher share of exports, would have a positive product mix," he said.
He also stated that the premium-focused manufacturers generally enjoy better pricing power and are therefore better positioned to protect margins.
He also expects the two-wheeler segment to outperform passenger vehicle and commercial vehicle makers during the June quarter, aided by a stronger export mix and relatively resilient demand.
Also Read | Bajaj Auto Q1 Result: Profit Surges 42% YoY, Revenue Up 37% To Rs 17,244 Crore
He also said that the ancillary segment is benefiting from long-term structural drivers, including premiumisation, the electric vehicle transition, precision engineering capabilities and expanding export opportunities, which are supporting sustainable earnings growth.
"We remain constructive on the OEMs, but we believe ancillaries have entered a structural purple patch," Agrawal said.
Within the OEM space, he continues to favour companies with a stronger presence in the premium segment and higher export exposure, saying they are better equipped to navigate the current cost environment than manufacturers focused primarily on the entry-level domestic market.
Essential Business Intelligence, Sharp Market Insights, Practical Personal Finance Advice, Daily Fuel, Gold and Silver Prices and Latest Stories — On NDTV Profit.
