Mumbai: Retail investor Pankaj Sharma sold off his 25 shares in Tata Motors Ltd on 20 May, at Rs680 each, earning him a profit of just Rs250. He got through by the skin of his teeth.
Had Sharma dithered and waited another two weeks, he would have lost about Rs2,360 on his investment—the shares closed at Rs575.70 on Friday.
Slammed by rising raw material costs, slowing credit and an economy that is starting to cool off and damp big-ticket purchases, auto makers’ stocks are starting to slide as investors smell tough times ahead.
Auto makers agree.
The slowdown “is not something that the industry has brought upon itself,” Ravi Kant, managing director of Tata Motors, told Mint on 29 May of the overall weakness in the automobile industry. He called the current environment a “highly improbable situation which has arisen” and added it was “hurting the whole group of industries”.
India’s automobile industry is possibly going through its leanest phase in a long time. Sales of passenger cars, trucks and two-wheelers dropped 4.7% in the last fiscal year that ended on 31 March, according to the Society of Indian Automobile Manufacturers (Siam), an industry body.
And the earnings of auto makers reflects some of that slowdown.
Capturing that, during the last eight quarters ended on 31 March, the BSE Auto Index rose only 6.7% to 4,524.77 points. During the same period, the benchmark Sensex index of the Bombay Stock Exchange rose 68% to 15,644.44.
Mint has analysed the performance of the major listed automobile companies, excluding two-wheeler makers since not all of them have reported earnings for the latest quarter.
A look at the performance of Tata Motors, Maruti Suzuki India Ltd, Ashok Leyland Ltd, Eicher Motors Ltd and Mahindra and Mahindra Ltd in the past eight quarters shows that growth in net sales and profits have been constantly slowing year-on-year in each quarter. What’s worse is that growth in sales and profits have been the lowest in the latest quarter that ended on 31 March.
The growth in combined net sales for these companies has come down from 32% in the quarter ended June 2006 to just 8% year-on-year in the last quarter. Operating profit rose 36% in the June 2006 quarter from the same period the previous year, but it posted a decline of 10% in the three months ended 31 March 2008.
Breaking down the data for the March 2008 quarter showed that while utility vehicle maker Mahindra and Mahindra had the highest growth in sales at 15% year-on-year, truck maker Eicher Motors was the worst performer with a growth of 5.5% in its sales.
Ashok Leyland’s adjusted profit after tax grew the most, gaining 5.31% over the year-ago period, while India’s largest car maker, Maruti Suzuki, stood at the bottom of the list after its profits were down 34% over the March 2007 quarter. Mahindra and Mahindra and Eicher Motors were again the best and worst performers, respectively, in terms of their operating profits.
Company executives put the blame squarely on the huge surge in input costs and tighter credit conditions for lower sales and declining profits. The industry is getting hit from all sides, they say.
On one side, the price of raw materials such as steel have doubled in the last three years. Global oil prices touched an all-time high of $135 (Rs5,751) a barrel in recent days, which has prompted the Indian government to also contemplate a hike in fuel prices.
Higher oil prices will fuel inflation, already the highest at 8.1% in over three-and-a-half years. This is likely to slow down the economy, further crimping the sale of cars and trucks.
“With inflation continuing to surge, a cut in interest rates is unlikely in the near term,” wrote Sahil Kedia, auto analyst at brokerage firm Enam Securities Pvt. Ltd, in his sector report for May. “We expect volumes to remain under pressure across the board as a result, and remain less sanguine over the sustainability of volume growth in the coming months.”
Lending rates are at a six-year high in India where 70% of all cars are bought on credit. And, while that’s already bad, banks and non-banking finance companies have limited their exposure to consumer lending including vehicle loans in the past several months since borrowers are finding it tough to pay back loans.
Indeed, the country’s biggest private lender ICICI Bank Ltd has decided to focus on lending to firms rather than on consumer loans, mortgages and auto loans, a business strategy it was following aggressively in the last three years. “The automobile industry is being squeezed,” Kant of Tata Motors said.