Vehicle makers’ profits dip as buyers stay away

Vehicle makers’ profits dip as buyers stay away
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First Published: Wed, Jul 11 2007. 01 00 AM IST

Updated: Wed, Jul 11 2007. 01 00 AM IST
Mumbai/New Delhi: Indian bike makers will probably see a drop in net profit for the first quarter of fiscal 2008, a second straight period of decline as consumers avoid or postpone purchases because of more expensive vehicle loans.
Higher raw material costs are also likely to have dented profit.
It isn’t just bike makers. According to an estimate of five analysts, the higher interest rate will probably damp profit growth for most vehicle makers. Only India’s second largest truck maker, Ashok Leyland Ltd, and the largest tractor maker, Mahindra and Mahindra Ltd, are likely to say their profit rose in the quarter ending 30 June, as they sold more of some of their brands, analysts predict.
In the two-wheeler segment, the largest Indian bike maker, Hero Honda Motors Ltd, is expected to see its net profit for the first quarter drop to Rs181.68 crore, a decline of 23.57% from a year ago. TVS Motor Co. Ltd, the No. 3 bike maker, is estimated to have the largest drop in profit—a 73.62% decline in its net profit—to Rs5.6 crore. Bajaj Auto Ltd, the second largest bike maker, is estimated to see a 9% decline in net profit to Rs248.24 for the three months ended June. The company is announcing it first quarter results on Thursday.
“Volumes declined by 8.7% year on year for two-wheelers during the quarter as interest rates and inventory pile-up played spoilsport,” said ASK Securities India Pvt. Ltd in a note on the quarterly results preview. “For the two-wheelers, along with a slowdown in volume growth, competitive pressures continue.”
The brokerage expects a 3.45 percentage point decline in the operating margin to 9.7% for two-wheelers because of the weak volumes and continued discounts to consumers.
In the last six months, commercial banks have increased the interest rates for vehicle purchases by more than three percentage points as the Reserve Bank of India increased short-term lending rates to these banks to tighten borrowing and contain inflation. The interest rate on two-wheeler loans has increased the most, shooting up to 20%-25% from 16-17% in December. The interest rates for car and commercial vehicles loans in the same period has increased from nearly 10% to 13.5% and from about 10.5% to 14.5%, respectively.
“The slowdown was mainly due to increased cost and stringent norms being followed by retail financiers,” said TVS Motor in a statement on 2 July. Small financiers are seeking larger down-payments for the vehicles, and reducing the outstanding loans, concerned that individuals might default. The non-payment rate for two-wheelers can be as much as 4% of all loans, whereas in passenger cars, that rate is 0.5%.
Vehicle makers have also been hit by the price of raw materials ranging from steel to rubber. The price of cold-rolled steel coils, used extensively in auto manufacturing, has increased 7% to Rs39,000 per tonne over the last three months, according to data from a government arm, the Joint Plant Committee. The prices of nickel, another material used mainly for engine components, have increased 39% to $36,150 per tonne over the last year, according to data from the London Metal Exchange.
While sales of four-wheelers continue to rise, some of the revenue growth may come from selling more expensive models. Maruti Udyog Ltd, the country’s largest car maker, is expected to gain from higher priced cars such as the Swift and SX4, which it has sold more of in the latest period. Mahindra and Mahindra Ltd is also expected to have benefited from the sale of its latest introduction, the Logan, which it is making in partnership with French car maker Renault SA.
However, the average of the five analysts’ poll suggests that Maruti is estimated to record a drop of 2.15% in its net profit at Rs361.62 crore for the quarter ending 30 June. The company achieved 17.1% growth in the numbers of vehicles sold in the quarter ending 30 June over the previous year same period.
“Margin for four-wheelers is expected to marginally decline by 38 basis points (0.38%) to 11.5% due to cost pressures,” said the ASK report.
“It launched the Logan in the quarter and also achieved around 25% higher sales for its utility vehicles,” ” said Vaishali Jajoo, analyst, Angel Broking Ltd. And the second largest truck maker, Ashok Leyland, is expected to achieve 7.89% growth in its net profit at Rs77.68 crore.
“Their volumes have held up much better compared to others,” said Ashutosh Goel, analyst with Edelweiss Securities. “They also had a backlog of bus orders, spilled over from last year. Bus margins are higher as they supply fully built buses.”
In the past three months, the BSE auto index rose 8.39%. In comparison, the scrips of Ashok Leyland and Mahindra and Mahindra rose 7.44% and 9.7%, respectively.
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First Published: Wed, Jul 11 2007. 01 00 AM IST