Automobiles: Auto makers bounce back after crossing regulatory hurdles
Close on the heels of surprisingly strong sales in the September quarter and shrugging off the effect of the November ban on high-value banknotes, and new Bharat Stage-14 (BS-IV) emission norms, auto makers churned out a good set of results. Across segments, be it passenger cars, two-wheelers, commercial vehicles (CVs) and even tractors, sales grew at a brisk, robust double-digit pace.
Perhaps the festive cheer and pent-up demand, after supply was temporarily disrupted due to the emission norms change and the new goods and services (GST) tax, accelerated sales, and that led to a marked improvement from the June quarter.
Of course, as expected, Maruti Suzuki India Ltd (MSIL) was the outlier, ticking all the boxes that mattered, with an 18% jump in sales year-on-year (y-o-y). A huge revenue boost of 21.8% helped beat operating margin estimates by 18 brokerages.
Meanwhile, utility vehicle (UV) sales, too, marched ahead. Mahindra and Mahindra Ltd’s results bettered forecasts and doled out bonus shares to investors even as profitability expanded in both UVs and tractors.
Two-wheeler makers measured up, too. Bajaj Auto Ltd’s domestic sales rose after a 10-month decline. Hero MotoCorp Ltd and TVS Motor Co. Ltd followed suit. Good monsoon rainfall, along with a pipeline of good launches, augur well for the segment. A slowdown in sales at Eicher Motors Ltd, maker of the Royal Enfield motorcycle, was a function of capacity constraint rather than weak demand.
Among commercial vehicles (CVs), in which the sales bounceback was the strongest on the back of replacement demand, Ashok Leyland Ltd shone with a 31% y-o-y jump in revenue.
Tata Motors Ltd’s domestic truck sales, too, improved, compared with the past few quarters, and its UK-subsidiary, Jaguar Land Rover Plc, as always, brought in all the consolidated profits.
What impressed the Street about the auto sector was the operating margin expansion in spite of higher raw material costs. However, a combination of factors such as forex gains, festive demand and higher sales, new models that offered no discounts and, hence, improved overall realizations alleviated the adverse impact of higher raw material cost.
Meanwhile, accounting changes under GST also lowered other expenses that gave a leg-up to margins. Therefore, most auto firms posted 100-200 basis-points margin expansion when compared with a year ago. One basis point is one-hundredth of a percentage point. Profits, too, were significantly higher, justifying the sky-rocketing valuations, where stocks of auto manufacturers are trading at 20 times FY19 estimated earnings.
Indeed, the sales buoyancy is likely to continue, especially in cars and two-wheelers, on the back of rural demand. CV demand is seeing a shift towards higher tonnage vehicles in the medium and heavy CVs. However, this does not guarantee continued upward trajectory in margins.
Some firms in analyst conference calls and media releases have indicated that stiff competition and higher costs may reflect in the second half of the current year, which may weigh on auto makers’ profit margins.