Auto sector share in March quarter Sensex earnings to drop

 

 

 

 

 

 

 

A look at the auto sales for the March quarter indicates that the quarter which normally delivers good performance may, this time, belie that trend. Both revenue and profit growth are expected to be subdued, with some respite coming from two-wheeler firms and exports. The results of four wheeler makers- passenger cars, utility vehicles and commercial vehicles-will fail to enthuse the street.

 

 

 

 

It’s the four-wheeler makers that drag the overall auto sector profits down. Poor consumer sentiment on account of higher price of passenger cars and higher fuel prices hit revenue during the quarter. Dealers say that even the demand for diesel cars has waned following the rising price of diesel. Maruti Suzuki India Ltd (MSIL) and Mahindra and Mahindra Ltd (M&M) will post a year-on-year dip in revenue. In fact, the fall in utility vehicle sales will pull down M&M’s revenue in spite of the growth in tractor sales. M&M’s passenger vehicle sales were down 17% during the quarter as UVs faced stiff competition from Ford Eco-Sport too.

Even excise duty cuts supposed to rev up sales failed to improve footfalls in showrooms. On the contrary, a report from Religare Securities Ltd says that operating margins of most manufacturers may take a beating following the one-time dealer compensation given to offset the excise-duty linked price cuts. A flat or a 50-100 basis point dip in operating margin will not surprise the street.

However, margin contraction was arrested to some extent by stringent inventory and cost cutting in addition to a fall in raw material prices. A Prabhudas Lilladher report says that major raw material prices fell by 4-5% in the last few months. Expect a 3-4% raw material cost savings in the March quarter when compared to the December quarter.

Considering specific companies, Maruti’s cost pressures may be offset due to benefits of a depreciated Japanese Yen. Among two-wheelers, TVS Motor Co. Ltd may be the outlier with improved performance driven by higher exports and improved profitability. Market leaders like Bajaj Auto Ltd and Hero Motocorp Ltd will likely post subdued performance. Commercial vehicle makers, who have been facing the brunt of the recession for many quarters are unlikely to show any sharp turnaround in profitability, as poor sales keeps the operating leverage low. All that can be said is the performance will seem less deplorable given the low base of earlier quarters.compared to the December quarter.

Considering specific companies, Maruti’s cost pressures may be offset due to benefits of a depreciated Japanese Yen. Among two-wheelers, TVS Motor Co. Ltd may be the outlier with improved performance driven by higher exports and improved profitability. Market leaders like Bajaj Auto Ltd and Hero Motocorp Ltd will likely post subdued performance. Commercial vehicle makers, who have been facing the brunt of the recession for many quarters are unlikely to show any sharp turnaround in profitability, as poor sales keeps the operating leverage la m ow. All that can be said is the performance will seem less deplorable given the low base of earlier quarters.

Critical factors like infrastructure policies post-elections, monsoons and interest rates are key determinants of vehicle sales. l that auto firms have learnt to sustain profitability through internal resource management, sales volumes are the key to any revival in the sector.

 

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