Auto Sector Q2 Review: OEMs struggle, 2W demand supports ancillaries; tyre profitability hit by RM costs

The auto sector's Q2FY25 performance was shaped by varied trends across segments, with original equipment manufacturers reporting muted topline growth due to sustained weakness in the Commercial Vehicle, Passenger Vehicle, and global luxury segments. The brokerage said that the aggregate revenue of auto OEMs under its coverage universe was up 2% YoY in Q2FY25, driven by a double-digit YoY increase in 2W segment volumes, a richer product mix, and price hikes, which were partly offset by a 9% YoY decline in the CV sales volumes, a 1% decline in PV sales volumes, and a 10% YoY decline in the JLR business. Further, the brokerage stated that the bearing companies under its coverage universe reported a 12% YoY revenue growth in Q2FY25, driven by strong performance in the railway segment, aftermarket division, higher two-wheeler production volumes, and robust export growth. Kotak further highlighted that the diversified auto ancillaries under its coverage universe posted a 12% YoY revenue growth in Q2FY25, driven by strong two-wheeler production volumes and steady replacement segment growth. Softening of steel, copper, and rubber prices to aid margin expansion for auto OEMs from 3QFY25E According to the brokerage, international and domestic natural rubber prices have corrected 25% and 18%, respectively, in the past month, as the domestic tyre manufacturers abstained from the procurement of domestic rubber as the domestic prices were trading at a premium to international rubber prices, which led to price adjustment in the domestic market.