Kotak [KIE] - Automobiles & Components: 1QFY26 review: Tepid quarter; festive season remains a key

Key highlights of 1Q were: (1) OEMs-weak operating performance led by muted consumer demand, (2) diversified auto ancillaries-strong tractor/replacement demand supported growth for domestic suppliers; global suppliers' numbers remained weak due to multiple headwinds and (3) tire companies-operating performance impacted due to inflationary trends in rubber prices. While we expect global demand to remain subdued, festive holds the key for domestic auto demand. Remain selective in the sector.

OEMs-weak operating performance, led by muted consumer demand

Overall, OEMs saw stagnant volume growth, led by muted PV/2W demand, offset by stronger tractor demand. Tata Motors, in particular, saw significantly weak profitability this quarter in the PV segment and JLR due to tariff impact and adverse forex. Aggregate revenue of auto OEMs, excluding Tata Motors, was up 8.4% yoy in 1QFY26, driven by (1) a double-digit yoy increase in the tractor segment's volumes, (2) low-to-mid-single-digit growth in PV, CV and 2W volumes and (3) a richer product mix for select OEMs, partly offset by higher discounts. Overall, the EBITDA of the auto OEMs, excluding Tata Motors, grew 3.2% yoy, driven by 24%/32% yoy increases in the operating profit of M&M/TVS Motors, partly offset by EBITDA declines for MSIL, HMCL and HMIL. As a result, the aggregate EBITDA margin fell 70 bps yoy to 13.4%.

Steady domestic demand aided growth for select diversified auto ancillaries

Diversified auto ancillaries' revenue growth increased 5.7% yoy in 1QFY26, led by mid-to-high single-digit growth in production volumes of the CV and tractor segments, low single-digit growth in the PV segment and steady growth in the replacement segment, partly offset by weakness in global auto markets. EBITDA declined 3.9% yoy in 1QFY26, driven by (1) a 9-19% yoy declines in SAMIL, BHFC and SONACOMP's EBITDA and (2) RM headwinds for tire names, partly offset by an operating leverage benefit for domestic ancillaries and an improvement in profitability for select auto part manufacturers. Gross margins fell 30 bps yoy due to RM headwinds and pricing pressures.

Rubber price tailwinds expected to improve profitability of tire names

Tire companies, especially MRF and CEAT, posted strong revenue growth, but overall profitability growth was muted, owing to RM headwinds. We expect the margins to recover from 2QFY26E, as the rubber and crude oil prices have corrected by 10-15% in the past 2-3 months. However, the outlook for the global OHT segment remains weak, which will weigh on margin recovery for BKT.

Luxury vehicle market remained under pressure

The luxury passenger vehicle market declined 6% yoy, with volumes declining for most luxury brands, except for Lexus, which grew 6% yoy, despite muted demand trends. While luxury car buyers are more resilient to price rises, the two-fold setback from US tariffs and ultra-luxury tax in China threatens demand in the two biggest markets in a segment already reeling from declining volumes.

Source : Equity Bulls

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Kotak KIE Automobiles Components Q1FY26Review