Auto makers may see decline in net profit

Auto makers may see decline in net profit
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First Published: Wed, Jan 23 2008. 11 05 PM IST
Updated: Wed, Jan 23 2008. 11 05 PM IST
Market leaders in different categories led by Maruti Suzuki India Ltd, India’s largest seller of cars, may say net profit grew for the third quarter of fiscal 2008 as they sold more vehicles in the festival season. But most other companies, especially two-wheeler and commercial vehicle makers, are likely to report a decline in net profit or a muted growth in earnings as lending rates that are at a five-year high curbed buying and eroded sales.
Fewer trucks, passenger vehicles (cars and utility vehicles) and two-wheelers were sold in the three months ended December, and sales fell 1.8% in that period—the third straight quarterly decline, as high interest rates forced customers to defer purchases. As many as 85% of India’s passenger vehicles and 60% of two-wheelers are financed by banks or other financiers.
The company that is likely to post the largest yearly increase in profit for the quarter ended December is Maruti, according to the average of estimates of five analysts whom Mint polled.
Maruti sold more cars in the quarter, riding on higher festive season buying and rebates. The festival season, which includes Dussehra and Diwali, is considered an auspicious time to purchase consumer durables. Maruti is expected to record a 22.53% increase in its net profit at Rs461.2 crore for the quarter.
“Maruti would be able to enhance its profitability due to successful cost reduction, productivity improvement and increased localization,” wrote Amit Kasat and Rohan Korde, analysts at Motilal Oswal Securities Ltd in a report.
Still, “rising input/power costs, consolidation of the Manesar assembly plant and higher royalty payments (owing to new model launches) are challenges to margins.”
Mahindra and Mahindra Ltd, India’s largest seller of utility vehicles, is expected to say sales rose by 14% as it sold more Scorpio and Bolero models. Its profits are likely to grow at a slower rate due to a decline in the sales of tractors which are more profitable, but are bought by customers who are more interest-rate-sensitive. As with tractors, commercial vehicle makers Ashok Leyland Ltd and Tata Motors Ltd, too, are facing the brunt of higher interest rates as truck sales slowed to a single digit increase in the quarter ended December after posting double-digit growth in the past three years.
While Tata Motors is expected to post a flat growth in profit, rival Ashok Leyland is likely to say both sales and net profit declined.
In the two-wheeler segment, Hero Honda Motors Ltd, the country’s largest two-wheeler maker and the only listed company to post an increase in sales, is likely to show an increase in net profit of 9.4%.
“In two-wheelers, margins will be under pressure due to higher raw material costs, and advertising and marketing costs as a result of new launches in the case of Bajaj Auto and TVS Motor,” said Vaishali Jajoo, automotive analyst with Angel Broking Ltd.
TVS Motor Co. is introducing as many as nine new products in the year to March (its first launch was in August 2007) but cannot sell one of these, the Flame—this was to be the cornerstone of its turnaround—because the model was stuck in a patent litigation. Bajaj Auto Ltd launched the XCD model, which helped it arrest the decline in sales, but promotional expenses on the product and rebates of up to Rs3,000 on the Platina model are likely to dent its profits.
Ammar Master contributed to this story.
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First Published: Wed, Jan 23 2008. 11 05 PM IST