Seoul: South Korea’s largest auto maker Hyundai Motor Co. reported an unexpected decline in second-quarter profit after currency-related losses eroded gains from higher vehicle sales.
Net income dropped 11% to 546.9 billion won (Rs2,276.4 crore) from 611.5 billion won a year earlier, the Seoul-based auto maker said via email on Thursday. That was below the 632 billion won median estimate in a Bloomberg survey of seven analysts. Sales rose 13% to 9.11 trillion won.
Wrong bets: A file photo of the Hyundai motor factory in Sipcot Industrial Park, Tamil Nadu. Photograph: Madhu Kapparath / Mint
Currency losses have hurt Hyundai’s earnings even as $4-a-gallon petrol spurs demand for its Elantra compacts and Sonata sedans in the US, the world’s largest auto market. The company posted a lower-than-expected first-quarter profit after making losses worth 138 billion won from wrong-way bets on the euro.
“The currency-related losses ate into earnings,” Song Sang Hoon, a Seoul-based analyst at Kyobo Securities Co. Ltd, said before the announcement. “Still, the weaker won also helped boost Hyundai’s repatriated sales from exports and cemented its price competitiveness outside of Korea.”
The won dropped 5.3% aga-inst the dollar in the second quarter and 5.1% versus the euro. Operating profit, or sales minus the cost of goods sold and administrative expenses, rose 6.4% to 662.5 billion won.
Hyundai rose 1.38% on Thursday to close at 73,300 won in Seoul trading, paring earlier gains. The company has risen 2.5% this year, compared with the benchmark Kospi index’s 14% decline.
Hyundai sold 756,466 vehicles worldwide in the period, with overseas growth offsetting a 0.6% domestic decline, the company said in a statement before the earnings announcement. Sales in South Korea, Hyundai’s biggest market, fell to 160,277 as a slowing economy damped demand. Overseas sales accounted for 58% of Hyundai’s revenue last year.
Second quarter sales in the US, Hyundai’s biggest overseas market, rose 2.5% to 135,728. Industry-wide vehicle sales slumped 12%, with sales of GM and Toyota trucks each plunging at least 19%. Oil prices have risen about 70% in the past year.
“These hard times could be a golden opportunity for Hyundai,” said Nam Kyung Moon, an analyst at Meritz Securities Co. Ltd. “It needs to do whatever it can to expand its market share in the US and other major markets, while Japanese rivals are having trouble with the stronger yen.”
Hyundai boosted China sales 58% and India sales 37%, after expanding its production capacity in the world’s two fastest growing major auto markets. The company’s total overseas sales jumped 21% to 596,189. “Hyundai’s doing well in emerging markets,” said Kevin Lee, an analyst at Good Morning Shinhan Securities Co. Ltd in Seoul. “That’s more than offsetting a slowdown in the US and it will continue to be that way for time-being.”
The car maker began building a €330 million (Rs2,171.4 crore) factory in Russia last month in a bid to become the top producer in Europe’s fastest growing major market.
Profit growth may slow in the rest of the year because of rising raw material costs and a weaker global economy, said Park Chang Suk, who manages about $592 million (Rs2,486.4 crore) of assets at NH-CA Asset Management Co. in Seoul including Hyundai stock. The car maker also cut its full-year domestic sales forecast by 6% earlier this month, after sales dropped by 15% in June, the first decline in six months.
“The rising oil prices and slowing economy are clouding overall sentiment on the auto industry worldwide and Hyundai can’t be an exception to that,” said Park. “The earnings growth should slow from the second half.”
The auto maker will raise vehicle prices by about 2% next month because of higher costs for steel and other materials. Posco, the auto maker’s biggest steel supplier, has raised sheet prices three times this year, boosting the price for benchmark hot-rolled coil 63% because of rising iron ore and coal costs.
The rise in steel prices may raise Hyundai’s annual costs by about 400 billion won, and cut its operating margin by about 1 percentage point, said Kim Sang Hoon, an analyst at Korea Investment Trust Management Co., which manages about $14 billion of equity assets including Hyundai stock.