Earnings Preview: Automobile sector

Earnings Preview: Automobile sector
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First Published: Wed, Jan 07 2009. 09 35 AM IST

Updated: Wed, Jan 07 2009. 09 35 AM IST
The sales volumes of automobile companies were the worst hit in Q3FY2009. Sales plummeted in this quarter due to the slowdown in the macro environment and the tight liquidity situation in October and November 2008.
As a result, even the build-up of inventory in anticipation of a demand pick-up in the festive month of October did not culminate into sales.
This led to the piling up of inventory instead and suppressed demand, causing the automakers to rework their production plan and undertake shutdowns during the end of the quarter.
The two-wheeler segment performed relatively better than the four-wheeler segment in this period. The commercial vehicle (CV) segment was the worst hit as the economic slowdown caused the softening of the freight rates and affected the availability of freight, thereby leading to defaults of loans by the freight operators.
Higher interest rates, tight liquidity and uncertain macro environment took their toll on the passenger car segment during the third quarter.
Among the heavyweights, Maruti Suzuki’s sales volumes declined by 14%, the worst drop in recent memory. Mahindra and Mahindra (M&M)’s automotive sales volume decreased by 24% and the sales volume of its farm equipment segment dropped by 16%.
Tata Motors’ sales volumes fell by 32% with those of CVs dropping by 42% and of passenger vehicles falling by 18%. Ashok Leyland’s volumes for the quarter are expected to decline by 55%. The volumes of Bajaj Auto Ltd (BAL) dropped by 30% during the quarter.
Outlook
The operating profit margins (OPMs) are expected to be badly hit due to the heavy discounts being offered to push sales, the lower volume growth and the burden of excise cut on the inventory.
The macro-economic factors affecting the industry are not showing any signs of recovery. However, the government and the automobile companies are undertaking measures to improve automobile sales.
In all probability, Q3FY2009 is going to be the worst quarter for the industry and things should start improving from the fourth quarter onwards. The decline in commodity prices should provide some relief from the next quarter onwards.
We prefer four-wheelers and two-wheelers, and maintain our cautious view of the CV segment.
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First Published: Wed, Jan 07 2009. 09 35 AM IST
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