While cost inflation is fairly large, OEMs are focusing on more than offsetting the same through price increases (of 1-6 per cent in 2Ws, Tractors, and PVs), lower discounts (100-400bp across segments), cost cutting (80-100bp), and operating leverage (150-170bp).
"Putting all negatives and positives together, we expect EBITDA margin to improve to 13.3 per cent by FY23E (v/s 10.5 per cent in FY20 and 12.7 per cent in FY19) as the impact of commodity cost inflation is more than offset by benefits of price increases, lower discounts, cost cutting initiatives, and operating leverage," the report said.
With a likely pick-up in volumes (higher asset turns), margin improvement, and lower capex intensity, the brokerage expects a sharp improvement in FCF generation over FY21-23E. "For our Auto OEM (excluding JLR) universe, FCF conversion (percentage of PAT) is estimated to be at 100-125 per cent over FY21-23E (as against 20 per cent/33 per cent in FY20/FY19)," it said.
Analysis of past cycles suggests that valuations expand as the cyclical recovery sustains, laying the foundation for the next upcycle. Current valuations reflect an early to mid-cycle recovery, with scope for a further rise if the volume expansion sustains.
(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)
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