Mumbai: Auto makers are expected to post a mixed bag of results in the quarter ended March, with volume growth not necessarily translating into substantial profits for all car makers, even as margins may get crimped due to higher expenditure on marketing and sales promotions.
Even the relatively stable prices of key raw materials such as steel, aluminium and rubber, sequentially, will not provide much relief, said analysts who see the trend continuing in the current quarter as demand for petrol models falls and car makers feel the excise duty hike impact.
The average estimates of six brokerage firms—Standard Chartered Securities (India) Ltd, Prabhudas Lilladher Pvt. Ltd, Angel Broking Ltd, Citi Investment Research and Analysis, Edelweiss Securities Ltd and Emkay Research—indicate that companies such as Maruti Suzuki India Ltd, Hero MotoCorp Ltd and Tata Motors Ltd may see robust volume expansion during the quarter, with the last month (March), in particular, boosting earnings.
On the other hand, companies such as Bajaj Auto Ltd and Mahindra and Mahindra Ltd (M&M) are expected to post muted earnings on the back of lower motorcycle and tractor volumes.
Mint’s Shally Seth Mohile says automakers are likely to post a mixed bag of results in Q4 with volume growth not necessarily translating into substantial profits for all car makers
“We expect margins to be compressed for all companies as a result of the mix of sales and marketing expenses,” said Mahantesh Sabarad, senior vice-president (equity) at brokerage Fortune Equity Brokers (India) Ltd.
During the quarter, sales of passenger vehicles—cars and utility vehicles—rose 15.2% to 814,072 units, according to the Society of Indian Automobile Manufacturers. Buyers thronged showrooms to buy new-year models and advanced purchases fearing there would be another round of price increases after the budget.
Also See | Mixed bag (PDF)
The volume and the profitability in the auto sector are expected to be largely driven by Tata Motors which, on the back of UK subsidiary Jaguar Land Rover Plc, reported strong volume expansion. The subsidiary accounted for 90% of the company’s overall profit and more than 70% of revenue in the third quarter of fiscal 2012.
Car market leader Maruti Suzuki is expected to continue to expand at a healthy clip on the back of new model launches—the Ertiga and the updated DZire and Swift—said Surjit Singh Arora, analyst at Prabhudas Lilladhar.
For the quarter ended March, Maruti is expected to turn in a profit of Rs 587.17 crore, up 54.75% over the same quarter last year. Helped by a restoration of normalcy in production that had been disrupted in the previous quarter due to labour unrest at its Manesar plant, Maruti sold 321,424 units in the quarter.
However, high discount levels for petrol models, coupled with the rupee’s appreciation against the yen, are expected to weigh on the company’s margins, which are likely to have been eroded sequentially to 7.8% from 9.5% in the third quarter.
Meanwhile, lower tractor sales during the quarter are likely to negate the benefits of brisk utility vehicle (UV) sales for M&M. The UV market leader is likely to see a contraction in both sales and profit. While sales is estimated to be down 1.7% year-on-year, profit is likely to be lower by 7.37%. Tractors account for 40% company’s sales revenue, and half of its profits, said Umesh Karne, analyst at Brics Securities Ltd.
M&M’s tractor sales declined 10% to 52,075 units in the quarter. Karne expects the slowdown in tractor sales to continue in the forthcoming months.
Ashok Leyland Ltd, the country’s second largest commercial vehicle maker, is expected to post high profit and revenue growth owing to the low base effect of last year. Profit at the Chennai-based firm is estimated at Rs 287 crore, up 323% over last year.
Aided by the new models such as the Evoque, sales at Tata Motors’ JLR is likely to soar 40% year-on-year, helping the consolidated profit touch Rs 3,726 crore, up 2,045%. “We expect earnings before tax, interest, depreciation and amortization, or Ebitda (operating), margins at the firm to improve 200 basis points to 17.8% year-on-year on account of operating leverage and favourable currency movement,” wrote Prabhudas’s Arora in a 3 April earning estimate report. One basis point is one-hundredth of a percentage point.
Among two-wheeler firms, market leader Hero MotoCorp is likely to outperform peers Bajaj Auto and TVS Motor Co. Ltd, as the company gained from high sales of 600,000 plus units in each month of the quarter. It may, however, not translate into high profit. Margins and profitability may be dragged down by the high expenditure on advertising and marketing the company embarked upon following the separation from Honda.
Bajaj Auto is expected to do better than Hero and TVS Motor, albeit with lower sales. Bajaj Auto’s profit is likely to drop 3.65% from a year ago, but margins may expand 12% year-on-year, helped by exports.
With the onset of wedding season, when two-wheeler sales generally get a boost, Brics’s Karne expects an upward tick in the segment. However, pressure on margins is likely to continue.
Going forward, the quarter ending June is expected to get tougher for some as petrol models take a beating with another increase in the price of the fuel round the corner, said Prabhudas’s Arora.
Sales momentum for the overall industry will be muted due to this and the impact of higher excise duty, and increased vehicle registration tax kicking in Maharashtra and few other states, Arora said.
Sales of commercial vehicles are likely to see tepid expansion after the fourth quarter, which is typically the best as transporters bunch purchases to take advantage of depreciation benefits in March, he said.
Graphics by Sandeep Bhatnagar/Mint