Rising costs of steel, crude oil may hit Q1 profits of auto cos

Rising costs of steel, crude oil may hit Q1 profits of auto cos
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First Published: Tue, Jul 08 2008. 09 46 PM IST

Updated: Tue, Jul 08 2008. 09 46 PM IST
New Delhi: Some of India’s largest auto firms, led by the country’s largest car maker Maruti Suzuki India Ltd, may see profit for the first quarter of 2008-09 decline, compared with the same period last year after rising costs of raw materials such as steel and crude oil crimped margins.
(CRIMPED MARGINS) Higher marketing costs in the form of discounts, and inability to effect price increases because of intense competition may have also dented profits, analysts say.
Most companies here follow the April-March accounting period and 30 June marks the end of their first quarter. The auto earnings season kicks off on Thursday, when Bajaj Auto Ltd will announce its results.
Not all companies would have seen their profits decline, add analysts.
India’s largest bike maker, Hero Honda Motors Ltd, and the largest tractor maker, Mahindra and Mahindra Ltd, are likely to say their profit rose in the quarter on the back of higher sales of larger motorcycles and high-powered tractors, profit margins on both of which are higher.
Motorbike maker TVS Motor Co. too may say profit rose as it had reported lower sales in the same quarter a year ago. Analysts say its profit may rise by as much as 170% to Rs5.7 crore.
Vehicle makers have been hit by the prices of raw materials ranging from steel to rubber. The price of hot-rolled steel coils has increased by at least 60% over a year, according to Bloomberg data. The price of nickel, a metal extensively used in engine components, has increased by 30% in the last quarter, according to data from the London Metal Exchange.
While almost all auto makers increased prices by between 1% and 5% in the just-ended quarter, analysts say these aren’t enough to offset the cost increase. “Manufacturers have not been able to pass on the entire cost increase, forcing them to absorb some of the cost pressures,” wrote Anikhet Mhatre of brokerage Prabhudas Lilladher Pvt. Ltd in a recent research report. “There will be a limit to which the market will be able to absorb the hike and consequently, the bottomline of automobile companies would increasingly be under pressure.”
According to the average of five analyst estimates, Maruti Suzuki is likely to report a 6.62% dip in net profit while Tata Motors Ltd, India’s largest truck maker, may post a 18.6% decrease in profit after tax, because of higher interest payments on a $3 billion bridge loan to fund the purchase of Land Rover and Jaguar and foreign exchange losses, according to an analyst with a foreign brokerage who wished to remain anonymous.
The numbers given here are not adjusted for extraordinary items.
Hero Honda is likely to post the largest yearly increase in profit for the quarter ended June, according to the average of estimates of five analysts whom Mint polled. The company sold more two-wheelers in the quarter, riding on newer bikes such as Hunk and CBZ Xtreme. It is expected to see a 29.5% rise in net profits for the quarter at Rs245.8 crore.
“The improvement in margin will be brought about by the relatively lower spend in advertising on the IPL (Indian Premier League Twenty20 tournament) compared with the 2007 cricket World Cup, improved demand conditions, and success of premium bikes —Hunk and CBZ-X,” wrote Amit Kasat of Motilal Oswal Securities Ltd in an earnings preview.
Analysts say the outlook for the market is not bright in the second quarter with new taxes on larger vehicles, the impact of fuel price hikes and further tightening of credit.
“We believe that it (input costs, interest rates and fuel costs) will come with a lag effect and would change the near-term demand outlook for the industry,” wrote Vaishali Jajoo of Angel Broking Ltd in a recent report.
Auto stocks mirrored the pessimistic outlook with the Bombay Stock Exchange’s Auto index falling 19.78% in the quarter.
On Tuesday, the index fell 0.3% to 3498.38 points even as the exchange’s benchmark Sensex index fell 1.3% to close at 13349.65.
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First Published: Tue, Jul 08 2008. 09 46 PM IST