Automobiles: Uncertain road ahead takes the charm off auto stocks

The auto sector results in the September quarter were nothing great to write home about and, added to this, the demonetisation has further deflated investor sentiment


Operating margins were flat, when compared with a year ago, as costs rose on the back of higher raw material prices and marketing costs.  Photo: Ramesh Pathania/Mint
Operating margins were flat, when compared with a year ago, as costs rose on the back of higher raw material prices and marketing costs. Photo: Ramesh Pathania/Mint

After a cushy ride for many quarters, most auto companies posted a subdued performance in the September quarter.

And, the uncertainty over the impact of demonetisation on auto sales has made investors step back from this sector, which had hitherto been fancied on the bourses.

In fact, the festive season translated into higher sales for most firms, especially for passenger vehicle and two-wheeler firms such as Maruti Suzuki India Ltd (MSIL), Hero MotoCorp Ltd (HML), Bajaj Auto Ltd and TVS Motor Co. Ltd. Net realization, too, moved up with lower discounts being offered during the quarter.

But operating margins were flat, when compared with a year ago, as costs rose on the back of higher raw material prices and marketing costs. Only MSIL clocked a jump in profitability, surpassing average estimates on the Street on the back of a robust 29% increase in net revenue. Likewise, HML in the two-wheeler segment proved its market leadership, topping estimates. TVS’s operating performance also improved, though Bajaj Auto’s dragged a bit due to weak exports to emerging markets, which comprise a significant chunk of total revenue.

The big disappointment was, however, Tata Motors Ltd, which is currently roiled in the fight between ousted Tata group chairman Cyrus Mistry and his predecessor, Ratan Tata. Its cash cow, Jaguar Land Rover Automotive Plc., failed investors as the operating margin fell below Bloomberg analysts’ estimates by about 70 basis points. This is in spite of excluding currency hedging losses and an unfavourable revaluation of current assets and liabilities. Meanwhile, the firm’s market share is slipping both in commercial vehicles and cars on the home turf.

Competitor Ashok Leyland Ltd’s sales dipped on a high base of the year-ago period, with profit gains coming from an improving balance sheet profile, mainly by pruning interest costs. Meanwhile, Eicher Motors Ltd derives its high valuation from its premium motorcycle, Royal Enfield, even as Mahindra and Mahindra Ltd got an edge from tractor sales, with its auto segment remaining lacklustre on the profit margin front.

On the whole, the auto sector results were nothing great to write home about. Added to this, the demonetisation drive has further deflated investor sentiment. A report by Religare Capital Markets Ltd says, “Vehicle bookings have dropped 30-40% in urban areas and 60% in rural areas—the real impact will be visible in the December quarter and could last till Q4FY17.” This apart, even the vehicle re-sale market could see a setback.

The BSE Auto index has been falling since demonetisation. Within the auto universe, the two-wheelers segment may be hurt more.

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