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Auto makers’ profits may skid on slow sales

Auto makers’ profits may skid on slow sales
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First Published: Tue, Apr 22 2008. 12 10 AM IST

Updated: Tue, Apr 22 2008. 12 10 AM IST
New Delhi: Indian auto makers, led by the largest car seller, Maruti Suzuki India Ltd, may post declining net profits in the fourth quarter of fiscal 2008 that ended on 31 March due to a slowdown in sales.
Two-wheeler makers Bajaj Auto Ltd and TVS Motor Co. Ltd are likely to be hit the most as lending rates that are at a six-year high limited buying, but market leader Hero Honda Motors Ltd may report profit growth because it managed to sell more of its high-margin vehicles and had reported depressed sales in the same quarter a year ago.
The auto companies sold fewer trucks, passenger vehicles (cars and utility vehicles) and two-wheelers in the three months to March, and domestic sales fell 5.3%—the fourth straight quarterly decline— as high interest rates forced customers to postpone purchases, and banks and financiers tightened credit norms due to higher default rates.
BUMPY RIDE (Graphic)
As many as 70% of India’s passenger vehicles and about 50% of two-wheelers are financed by banks or other financiers, according to bankers.
Hero Honda is likely to post the largest yearly increase in profit for the quarter ended March, according to the average of estimates of five analysts whom Mint polled. Hero Honda sold more two-wheelers in the quarter, riding on newer bikes such as Hunk and CBZ Xtreme.
The company is expected to record a 24% increase in its net profit for the quarter atRs242 crore.
“Hero Honda has been able to reverse the industry trend,” wrote Huzaifa A. Suratwala, an analyst at IL&FS Investsmart Ltd. “The newly launched Hunk (brand) has helped the company strengthen its hold in the premium segments and net average realizations are likely to be higher.”
However, rivals Bajaj and TVS are likely to suffer the most among the companies reviewed as their sales declined in double digit percentage points, say analysts.
Bajaj, India’s second largest two-wheeler maker, may say its net profit fell 16.25%, and its immediate rival TVS may report a halving of profit over a year ago.
The slowdown in the economy, which is reflected in paring down of economic growth estimates and in the index of industrial production, has also not left car makers unscathed.
Maruti Suzuki may report a marginal decline of 0.53% in net profit as its quarterly sales declined by about 1%. Mahindra and Mahindra Ltd, India’s largest seller of utility vehicles and tractors, is expected to say sales rose by 19% as it sold more Scorpio and Bolero models. Its profits are likely to fall by 1% due to a decline in tractor sales that are more profitable but are bought by customers who are more sensitive to interest rates.
As with tractors, commercial vehicle makers Ashok Leyland Ltd and Tata Motors Ltd, too, are facing the brunt of higher interest rates as truck sales slowed to a single-digit increase in the quarter ended December after posting double-digit growth in the past three years.
While Tata Motors is expected to show a marginal decline in profit, rival Ashok Leyland is likely to say net profit declined by 11.6%.
The story does not get any better for the current quarter that ends on 30 June, with budget incentives of lower excise tax failing to boost sales and prices of key raw materials such as steel and petroleum increasing by as much as 25% in a quarter.
“We estimate operating margins to continue to be under pressure,” wrote Vaishali Jajoo, an analyst with Angel Broking Ltd in a recent note. “Net profit growth for most players would primarily depend on average realizations and cost-cutting measures adopted by them.”
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First Published: Tue, Apr 22 2008. 12 10 AM IST
More Topics: Auto | Sales | Slowdown | Bajaj Auto | TVS Motor |