Mumbai: Indian auto makers, grappling with a prolonged and steep slowdown in sales, are likely to see a significant dip in earnings for the quarter ended 31 December, the third of fiscal 2009 for most companies.
“Earnings for the third quarter will be hit very hard,” says Mahantesh Sabarad, senior analyst at Centrum Broking Pvt. Ltd.
Five brokerage firms polled by Mint— Emkay Global Financial Services Ltd, Prabhudas Lilladher Pvt. Ltd, Centrum Broking, IDFC-SSKI Securities Ltd, and Angel Broking Ltd—all attribute the weak results to slowing sales, which in turn have made car and truck makers shut plants, reduce inventory and offer discounts to push sales.
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BNP Paribas expects overall profitability of the automobile industry to contract by 39.8% and net sales, in terms of value to decline by 14.7% over the same quarter last year.
Volume sales of commercial vehicles, the worst hit, have fallen by 47% in the last quarter, while sales of cars dipped 11%.
However, the 14-share BSE Auto Index has stayed flat so far this year rising marginally by 1.1% till 14 January. In the December quarter, it fell 33.5%, as sales of cars, trucks and two-wheelers slid in each of the three months, compared with the 24.9% contraction in the benchmark index of the Bombay Stock Exchange.
“The market has already taken the earnings into account,” says Sabarad.
Analysts surveyed expect profits at Tata Motors Ltd, country’s largest auto firm by revenues, to fall by 88% in the third quarter compared with the year-ago quarter. Its counterpart Ashok Leyland Ltd is likely to report a loss due to a sharp 105% dip in its profits.
“While there may be some improvement on a quarter on quarter basis, they will continue with the declining trend on a year-on-year basis,” said S. Arun, an analyst with DSP Merrill Lynch. As demand is unlikely to pick up, commercial vehicle makers will continue to report losses for the next two-three quarters, he added.
Credit rating agency Crisil Ltd on Wednesday announced that it was reviewing the credit worthiness of the country’s top two commercial vehicle makers. “Any rating or outlook change as a result of the assessment will be announced shortly,” it said in a statement.
Like the September quarter, Hero Honda Motors Ltd, is likely to buck the trend in the three months gone by but only just. Profit at the country’s largest two-wheeler maker is expected to fall by 1.5% but the company has shown that it, too, is vulnerable to market swings. Sales were down 4% in the December quarter.
Pune-based Bajaj Auto Ltd, which reports results on Friday, witnessed a 34.7% drop in sales and analysts expect profits to crash 47%.
Amid a slowing global economy auto makers have received a fillip from an unexpected quarter: declining commodity prices. “The third and fourth quarters would be tough and margins would remain under pressure. However, they are likely to improve with commodity prices in international market softening,” said Joseph George, an analyst at BNP Paribas.
Raw material costs as a percentage of total sales are expected to climb down by 50-70 basis points in the third quarter. A basis point is one hundredth of a percent.
Some companies such as Hero Honda are expected to have already benefited from reduction in prices of raw materials such as copper and nickel that are traded in the spot market. Car and truck makers are likely to see their raw material bill drop significantly in the fourth quarter ending 31 March as steel prices have declined by 9%, according to an earnings preview report by Motilal Oswal.
Companies may see margins improve in the fourth quarter once contracts for steel are renegotiated. Steel accounts for almost half of total costs and is supplied on fixed terms of three, six or 12 months.
Car makers are also likely to be hit hard with tightening financing options and weak consumer sentiment is likely to see buyers putting off purchases. Maruti Suzuki India Ltd, which reported a 14% year-on-year decline in volumes, is expected to see a 4% decline in sales growth. Net profit is likely to fall by as much as 47%, according to the five analysts surveyed.
Auto makers, optimistic of demand picking up in the next few quarters, say they plan to continue to launch models to stimulate demand. About 50 models are expected to be launched in 2009. Mahindra and Mahindra Ltd launched its new utility vehicle the Xylo on Tuesday while Fiat Automobiles India Pvt. Ltd launched its Linea on Wednesday.