Mumbai: India’s bellwether auto industry earnings are clearly headed downward with the commercial vehicle segment likely to be the hardest hit due to its significant dependence on financing.
Five brokerage firms that Mint surveyed—Emkay Global Financial Services Ltd, Motilal Oswal Ltd, Centrum Broking, SSKI Securities, and Religare Securities Ltd—attribute the weak results as well as growing pessimism to what has been a significant rise in the cost of financing, raw materials and fuel.
“Most auto companies will see a significant erosion in margins. This is on account of increased prices of key raw materials: steel by 30%, aluminium by 15% and tyres by 15% on a year-on-year basis,” notes Piyush Parag, an analyst with Religare.
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The only auto maker that looks set to buck the trend is motorcycle giant, Hero Honda Motors Ltd, which releases its earnings result on Monday. Truck maker Ashok Leyland Ltd will also report on same day giving early firm indicators of the July-September quarter.
Despite this outlook, the auto index of the Bombay Stock Exchange actually gained 2.49% for the July-September quarter while the broader Sensex lost 4.47% in the same period. This upward movement of the auto index was primarily driven by Mahindra and Mahindra Ltd, which gained 11% and has a 18% weight in the index; Maruti Suzuki India Ltd, which gained 4.4% and has a 17% weight in the index and Hero Honda, which gained 27% and has a 16% weight.
Hero Honda, which has a 55% market share, appears to have bucked the downturn. It is widely expected to clock a high, double-digit net profit growth of 46.43% and sales growth of 29.9% from the year-ago period. This is based on an average of earning estimates by the five firms Mint spoke to.
Figures released by the Society of Indian Automobile Manufacturers show that Hero Honda sold around 1.8 million units in the first half of FY09, a 20% growth year-on-year.
Analysts attribute the firm’s strong performance to a better-than-expected volume grow-th in units sold over a lower base last year, price hikes for various products, and a reduction in discounts to retailers.
An earnings preview report released on 8 October by Emkay noted that Hero Honda’s unit sales volumes are estimated to grow by 22.5% for the second quarter, driven by improvement in market share.
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Part of the bump in volume growth, however, is attributed by some analysts to so-called channel stuffing, where the company pushes out a large quantity of products ahead of the festive season. Receivables are also expected to improve by 4% on account of a price increase announced in mid-August, said the report. Apart from factors such as company’s greater reach in urban and semi-urban areas, Parag said some of the growth would also reflect a changing product mix, which now includes higher segment bikes.
Among other two-wheeler makers, Bajaj Auto Ltd’s earnings, which has a 32.7% market share in the motorcycle segment as per its FY08 annual report, are not comparable to last year’s because of a demerger with the finance arm in the first quarter of FY09. However, its unit sales volumes are expected to grow by 3.98% over the last year.
Analysts are also bullish on TVS Motor Co. Ltd, which has close to 18% share in the motorcycle segment, owing to the low base effect of last year, along with the success of new models such as TVS Flame in the executive segment; price hikes and discount reductions across the model range. The executive segment accounts for 55% share in the motorcycle market, according to firm’s FY08 annual report.
Cars and SUVs
The average of five analysts’ estimates suggests that all three listed auto makers—Maruti Suzuki, a subsidiary of Suzuki Motor Corp. of Japan, Mahindra and Mahindra and Tata Motors Ltd—are expected to report a decline in their net profit and minimal growth in their sales volume.
M&M also makes tractors, while Tata Motors makes trucks and commercial passenger and cargo vehicles. None of the analysts had specific numbers for the passenger car business of M&M and Tata Motors.
Komal Iyer, a research analyst at Sharekhan, wrote in her research report: “The main impact of the rising interest rates was felt by the passenger car segment with the B and C segments witnessing a slowdown in sales during the quarter.” The slowdown was led by Maruti Suzuki, which has a 51.4% market share according to the company’s 2007-08 annual report.
In a separate report, Emkay said, “We expect a disappointing performance in the quarter on account of subdued volume performance and pressure on costs front.”
Motilal Oswal also said it expected Maruti Suzuki’s volumes to fall by 3.8% due to macroeconomic factors. This will be the firm’s first decline since the first quarter of FY06.
While M&M may register an 11% volume growth across its entire product line, net profit may decline by 30%. “This would be mainly on continued pressure on their margins, which is a result of higher raw material costs and decline in their SUV, Scorpio and tractor sales,” said Parag.
This segment will likely have the worst showing among auto makers, primarily due to the huge dependence on financing. An analyst from Motilal Oswal said commercial vehicles have a 85-90% reliance on external funding, and the growing liquidity crunch, along with higher input costs, over the past quarter has taken its toll on this segment. Additionally, a structural shift from medium- and heavy-vehicles to light commercial vehicles, has also affected sales of new vehicles. He declined to be named because he is not authorized to speak to the media.
Both Tata Motors and Ashok Leyland are expected to report lower volumes of 15.4% and 4.01% and negative profit growth of 53.06% and 19.55%, respectively. In an interview with Mint on 15 September, P.M. Telang, executive director of Tata Motors’ commercial vehicle business noted that Tata Motors has undertaken three price hikes since April and that the results would show up in the quarters ahead.
“While price hikes undertaken by the manufacturers in first quarter of FY09 might have some sequential benefits on their profitability in the second quarter, higher cost of raw materials is expected to have maintained pressure in the second quarter of FY09 and would lead to a lower profit margin on a year-on-year basis,” said Iyer of Sharekhan.
Analysts expect the festive season, or the third quarter, to bring some cheer, however muted, to auto makers. “With the festive season in October and new launches in November, we expect to see a mild revival in sales volumes,” said a report by Enam.
While auto makers may report higher sales on a sequential basis, there wouldn’t be too much of difference on a year-on-year basis because of higher interest rates. “Moreover, it’s not fair to compare last year’s festive season with this year’s with both Diwali and Dussehra being in the same month unlike last year, ” said the Motilal Oswal analyst, explaining that this would mean people have one monthly pay cheque this year for both festivals instead of two. Festive season sales may also help marginally, but with lower realizations, as auto makers offer high discounts.
“The festive season and marriage season that kicks off in November may not lead to more than 6-7% growth in overall volumes,” said Parag of Religare.
Additionally, some auto makers—Tata Motors, Hero Honda and Ashok Leyland—are likely to benefit from production commencing at their facilities in tax holiday zones in Uttarakhand. Others, such as Maruti Suzuki, will benefit from new models such as A-Star, expected to be launched in November. Auto makers expect to ride on the disbursements of the arrears of the Sixth Pay Commission and have announced special schemes to woo the government employees. Analysts however, don’t think it will have any significant impact.