The performance of automobile sector in the third quarter of FY10 was in line with our expectations. Strong volume growth coupled with lower input costs led to a healthy earnings before interest, tax, depreciation and amortization (Ebitda) margin expansion during the quarter.
Our automobile coverage universe posted a revenue growth of 67.2% year-on-year (y-o-y), led by 61.8% y-o-y growth in volumes. On a sequential basis, revenue grew by 6.1%, mainly led by a 4.7% growth in volumes. On a sequential basis, Hero Honda Motors Ltd was the only company which reported a decline of 5.7% in revenue on account of a 6.1% decline in its volumes sequentially. Indications by various managements after the results were declared suggest that the volume momentum is likely to continue at least till the fourth quarter. There could be an effect on volumes, especially in the commercial vehicle (CV) and passenger car space in case of an excise duty rollback in the coming Budget.
Photograph by Babu Ponnapan / Mint; Graphics by Yogesh Kumar / Mint
Two-wheeler sales are showing consistent improvement in volume numbers for the past couple of quarters on the back of improvement in macroeconomic conditions, new launches by companies and less reliance on financing.
Bajaj Auto Ltd has been gaining market share at the cost of Hero Honda with Bajaj Auto’s market share at 24.7% as of December, a gain of 480 basis points (bps).
The gain for Bajaj Auto in the market share has come on account of the newly launched 100cc Discover.
New launches coupled with improvement in the availability of finance and lower interest rate led to a robust demand for cars in the last few months. MarutiSuzuki India Ltd reported a 15.5% growth over the previous month in domestic volumes in January. New launches by European car makers are likely to drive a double-digit growth for this segment in FY11.
The CV sector has witnessed consistent improvement in volume numbers on account of improvement in the availability of freight, a pick-up in the movement of commodities such as steel and iron ore and road/highway development activities gaining momentum. Thew need for last-mile transportation (hub and spoke model) is likely to drive the growth in the light commercial vehicle (LCV) segment with new launches by existing automobile manufacturers.
On a quarter-on-quarter (q-o-q) basis, raw material costs increased by 70 bps, thereby affecting Ebitda margins of all the companies with the exception of Maruti Suzuki. On a q-o-q basis, other expenses declined by 90 bps compensating for the 70 bps increase in the input cost for our coverage universe, thereby leading to constant Ebitda margins q-o-q at 15.2%.
Maruti Suzuki was the only company in our coverage universe which reported a sequential decline of 124 bps in raw material cost on account of benefits of lower input cost negotiated during the second quarter of FY10 being reflected in the third quarter. The companies indicated that raw material prices are likely to dent their margins.
Two-wheelers’ profit numbers were in line with our expectations. On the one hand, Maruti Suzuki beat expectations by a wide margin on account of the highest-ever Ebitda margins at 15.1%. On the other hand, Mahindra and Mahindra Ltd was below our expectation due to low other income and low operating margins compared with the expectations.
Tight cost control coupled with better operating leverage negated the effect of higher raw material cost for the quarter. On a q-o-q basis, other expenses declined by 90 bps, thereby compensating for the 70-bps increase in input cost for our coverage universe. Hence, Ebitda margins for the quarter were maintained at 15.2%, flat, sequentially.