Kotak Institutional Equities sees demand weakening in the automobiles and components sector.

What Happened: In its latest research note, the brokerage chose Tata Motors and Mahindra & Mahindra as its top picks in the auto original equipment manufacturer (OEM) segment. 

The aggregate revenue of the segment grew 9% in the first quarter of FY25. This was driven by growth in two-wheeler production volumes, a moderate growth of 3% year-on-year in passenger vehicles production volumes, a richer product mix and price hikes.

The EBITDA for Tata Motors' domestic commercial vehicles business came in 13% above the brokerage's estimates due to better-than-expected gross margins whereas the EBITDA margin stood 150 bps above its expectation Adjusted net profit of the firm surpassed Kotak's estimates by186%. However, revenue from the passenger vehicles segment declined by 8% YoY and EBITDA margin was 100 bps below the brokerage's expectations due to weaker product mix and higher discounts. 

M&M’s standalone EBITDA exceeded Kotak's expectations by 7%. The strong performance was driven by better-than-expected results in the tractor and automotive segments. In the automotive division, revenues increased 13% year-over-year. Whereas in the tractor division, they rose by 9% year-over-year. EBIT margins in both segments were above the brokerage's estimates.

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Jaguar Land Rover continues to outperform among global luxury OEMs, the brokerage noted. "The luxury passenger vehicle market declined 3% yoy, with volumes declining for most luxury brands, except for JLR, which grew 5%," it said.

Most metal prices including steel, aluminium, copper and precious metals witnessed a decline of 5-9%, the brokerage noted and it further expects them to remain at their current levels. This may lead to a 25-60 bps margin expansion for OEMs, Kotak added.

Moreover, the brokerage said that a sharp rise in the Yen against the Indian Rupee will increase the cost of imported raw materials, which is expected to negatively impact Maruti Suzuki‘s profitability starting from the third quarter of FY25.

In the diversified auto-ancillary space, Kotak's top picks were SAMIL and Uno Minda. The division's revenue growth stood at 23% YoY in the April to June period. Excluding SAMIL, revenue grew by only 12% YoY, it said.

Overall profitability among tyre companies remained muted, Kotak said. Increased competition in certain segments, combined with challenges from commodity prices, will further impact the profitability of domestic tyre companies, the brokerage noted. Outlook for the global off-highway tyres segment remains weak, coupled with cost pressures, it added.

Price Action: Tata Motors closed 0.79% lower at ₹1,090, Mahindra and Mahindra ended 2.59% down at ₹2,767 and Maruti Suzuki closed 0.56% lower at ₹12,145 on Monday.

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