Q2FY18 performance for most companies in the Auto and Auto Ancillary sectors surpassed our expectations. While OEMs across segments benefitted from the mismatch in the festive season leading to strong YoY volume growth, margins too surprised positively despite some commodity inflationary pressures (barring Ashok Leyland which suffered on account of heavy discounting at industry level). With events which hampered the performance for the sector over the past few quarters such as demonetisation, losses / discounts for selling BSIII related inventory, GST related uncertainty now more or less behind, outlook for the sector looks positive. Further, growth drivers like a second consecutive year of normal monsoon, improved demand from a normalised environment, growth in rural sales and a low base in H2FY17, should help the sector report good volume growth in H2FY18. Our preferred picks are Maruti Suzuki and M&M. Also, we remain positive on Ashok Leyland and Motherson Sumi from a longer-term perspective.
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