Most Indian auto firms may see a drop in net profit for the second quarter of fiscal 2008 because they sold fewer vehicles in the period compared with a year ago. Higher raw material costs and promotional expenses may also have dented profit. Still, analysts say the current quarter is likely to see an upswing as consumer loans become cheaper and companies launch new models.
The auto industry, which contributes around 5% of the nation’s economic output and 17% of indirect tax revenues, is usually an accurate indicator of consumer sentiment and the country’s larger economic performance. Over the next fortnight, companies such as Tata Motors Ltd, Ashok Leyland Ltd, Maruti Suzuki India Ltd, Bajaj Auto Ltd and Mahindra & Mahindra Ltd will declare their results for the quarter ended September.
The only company that is likely to have seen an increase in profit for the quarter, compared with a year ago, is Maruti Suzuki, according to the average of estimates of five analysts to whom Mint spoke. Maruti sold more cars in the quarter, riding on new launches and rebates.
Sales, in units, of trucks, passenger vehicles (cars and utility vehicles) and two-wheelers fell 6.3% in the three months to September, the second straight quarterly decline, as interest rates that are at a five-year high forced customers to defer purchases. As many as 85% of India’s passenger vehicles and 60% of two-wheelers are financed by banks or other financiers.
The country’s top two commercial vehicle companies, Tata Motors and Ashok Leyland, too, are reeling under high interest rates as truck sales slowed to a single digit increase in the quarter ended September after growing at over 30% last fiscal. Companies are also finding it tough to sustain the high rates of growth over the past three years. Both Tata Motors Ltd, the country’s largest truck maker, and Ashok Leyland Ltd are expected to report a decline in sales and profits.
Among the major listed passenger vehicle makers, only Maruti and Mahindra & Mahindra, India’s largest seller of utility vehicles, are expected to say sales rose, primarily on account of new models such as the Suzuki SX4 and the Renault Logan. Maruti is expected to record a 27% increase in its net profit at Rs466.42 crore for the quarter riding on a 29.6% increase in revenues. “Greater operational efficiencies, strengthening of rupee vis-à-vis yen, and the new plant operating at full production levels” will help Maruti strengthen its operating margins, wrote Amit Kasat, an analyst at Motilal Oswal Securities Ltd in a report. He added that “rising input/power costs and higher royalty payments due to new model launches are challenges to the margins.”
Maruti is likely to introduce a new model in the second half of the year, the Swift sedan, to replace the Esteem. Royalty payments are usually up to 3% of the sales of a model.
Mahindra & Mahindra is expected to say profits declined despite the revenue increase, mainly due to a shift away from its more profitable tractor business.
However, it is sales of two-wheelers and profits of companies that make them that are likely to have been hit the most by rising interest rates. Hero Honda Motors Ltd, Bajaj Auto, and TVS Motor Co. Ltd are all expected to see a decline in net profits. “Inflation and high interest rates adversely impacted two-wheeler volumes,” said Vaishali Jajoo, automotive analyst with Angel Broking Ltd, in a note on the coming quarterly results. “Though the companies reeled under margin pressure..., the same was not passed on to the consumers.”
Since the start of the fiscal, the Bombay Stock Exchange’s auto index has risen 13.25%.
In comparison, the 30-stock benchmark index, Sensex, has risen 40.5%.