Automobiles: Domestic sales growth in Q3 offsets increase in input costs
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The auto sector was in the spotlight in the December quarter for strong sales. Apart from the low base of the year-ago period, revenue growth was fuelled by robust volume expansion across vehicle categories, price hikes in vehicles and lower discounts.
Medium and heavy commercial vehicles clocked the best double-digit sales growth of more than 25% year-on-year (y-o-y), with light commercial vehicles following closely. Factors such as a low base, implementation of rules on overloading and new emission norms pushed up sales. Of course, the festive season and improvement in construction activity gave a leg up for utilization of trucks. Ashok Leyland Ltd, the country’s second largest truck maker, put up the best show in the segment, with a 58% revenue jump.
Among two-wheelers, Hero Motorcycles Ltd’s sales gained from rising rural demand, while Bajaj Auto Ltd’s performance got a shot in the arm by improved exports of two- and three-wheelers. Passenger vehicle sales, led by Maruti Suzuki India Ltd, continued to gain mileage, as has been the case for many quarters. Even tractor sales shone as good monsoon led to increased acreage for most crops.
Robust sales translated into strong operating leverage. This was timely as it helped offset the rising raw material costs that would have otherwise made a deep dent in operating margins. Yet, on a y-o-y basis, operating margin narrowed by 100-150 basis points for most firms. That said, the growth in net profit was not commensurate with operating profit expansion. This was because “other income for most firms was lower due to notional mark-to-market losses led by lower yields”, says a report by Emkay Global Financial Services. One basis point is one-hundredth of a percentage point.
But raw material prices have stabilized now and are, therefore, unlikely to drag margins further down. What’s important is continued momentum in demand, which will continue at least for a couple of quarters. The caveat is that higher fuel prices or interest rates could dampen demand. From an investor perspective, auto stocks more often than not trade at relatively high valuations of 17-20 times one-year forward earnings, leaving little headroom for high returns.