New Delhi: After posting steep and steady declines in the second half of last year, rising sales have brought cheer to auto companies in the first six months of 2009, and this is likely to be reflected in the finances of these companies.
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Still, year-on-year growth for some companies will be lower than what it was during the same period last year, due to a so-called base effect where high numbers in one year result in muted growth the next. Sales started falling from July 2008.
Auto companies have been able to sustain the momentum generated in the fourth quarter (of last fiscal year; January-March of this year), Jatin Chawla, an analyst at IIFL Capital wrote in his earnings preview report. According to him all segments, expect large trucks that the industry terms as heavy commercial vehicles, have registered substantial volume growth as the availability of finance has improved.
Five brokerage firms polled by Mint—Citigroup Global Markets Inc., India Infoline Ltd, IIFL Capital, Centrum Broking Pvt. Ltd and Angel Broking Ltd—also attribute the improved results to softening commodity prices.
Commodity prices, which peaked in the second quarter of the last fiscal year (July-September 2008), fell steadily in the third quarter. Most companies, however, have said they would only begin to benefit from the decline from the first quarter of this fiscal year (quarter ended June). These savings would result in net profit margins improving by 210 basis points, according to brokerage firm Motilal Oswal Securities Ltd.
A basis point is one-hundredth of a percentage point.
After the impressive performance of auto firms in the first three months of 2009, the 14-share BSE Auto Index has continued to rise. Ahmed Raza Khan / Mint
However, commodity prices have since started strengthening, which would mean lower margins in the coming quarters.
For instance, the price of steel has moved up 11% from $350 a tonne (Rs17,080 today) in the fourth quarter of the last fiscal year to $390 in the quarter gone by. Raw material bills for auto makers are typically 20% of revenues, with steel accounting for half of that. Prices of another key raw material, copper, have risen 25%.
Market leaders Maruti Suzuki India Ltd (in the passenger car segment) and Hero Honda Motors Ltd (in motorcycles) have outsold their peers in the last three months largely on the back of buoyant demand from rural India.
At least four out of every 10 bikes sold by Hero Honda are bought outside cities. Maruti, which has the country’s largest dealership network of 623 outlets, said that rural sales now make up 9.5% of all cars sold, up from 3.5% a year earlier.
Hero Honda is slated to post robust profits for the June quarter. Analyst estimates put net profit at Rs383.5 crore, up 40% from Rs272 crore in the same period last year.
Maruti’s net profit is likely to be down 26% to Rs341.9 crore because of currency fluctuations. The company had lost Rs121 crore in the fourth quarter of the last fiscal year.
After the impressive performance of auto firms in the first three months of 2009, the 14-share BSE Auto Index has continued to rise. It rose 48.9% in the quarter ended 30 June.
Boosted by its new model Xylo, Mahindra and Mahindra Ltd (M&M) posted a 29% increase in the number of vehicles sold in the quarter ended June. The firm, which sold 35,031 vehicles in this period, could post the highest profit growth among firms surveyed. Net profit for the quarter are expected to increase 70% to Rs266.9 crore.
Companies such as Maruti and M&M also benefited from cheaper financing from banks.
In February, State Bank of India, the country’s largest bank, reduced interest rates on car loans to 10%. It followed up last month by reducing rates further to 8% for the first year, and 10% for the second and third years.
Although other banks have not followed suit, analysts say reduced interest rates are likely to keep sales ticking in the coming months.
Falling volumes at the country’s No. 2 motorcycle maker Bajaj Auto Ltd are unlikely to dent profitability as the company’s focus on bikes in the executive (or higher-priced) segment may have resulted in improved profitability.
The executive segment is generally defined as bikes costing at least Rs40,000. Net profit for the quarter for Bajaj, which reports results on 16 July, is expected to rise 12% to Rs199.6 crore.
Bajaj recently announced its plans to re-enter the commuter segment. The company plans to launch a 100cc bike, which will be in showrooms by 27 July.
Truck makers Tata Motors Ltd and Ashok Leyland Ltd are likely to report reduced profits as demand for trucks shows no signs of picking up. Tata Motors also makes cars, but trucks contribute to nearly two-thirds of its profits.
Net profit at Tata Motors is expected to halve to Rs124 crore, while Ashok Leyland is likely to post a loss of Rs10 crore for the quarter, according to the five analysts polled.
Analysts say the worst is behind the two companies, but are still unsure about when demand for big trucks will improve.