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Four-wheeler shares rally, but concerns remain

Four-wheeler shares rally, but concerns remain
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First Published: Wed, Mar 03 2010. 12 30 AM IST

Updated: Wed, Mar 03 2010. 01 17 PM IST
Shares of four-wheeler makers have made the most of the improvement in market sentiment after the Budget. Tata Motors Ltd’s shares have risen the fastest (up 20%), but that’s mainly to do with the excitement about Jaguar-Land Rover’s return to profit. Shares of Maruti Suzuki Ltd and Mahindra and Mahindra Ltd have risen by 6% and 10%, respectively, since the Budget announcement, compared with a 3% rise in the broad market.
Investors have been lapping up auto shares in the last two trading sessions because the hike in excise rates was restricted to 2%. This had already been factored in by the markets. Besides, disposable incomes of individuals with a salary of over Rs3 lakh a year got a boost, which will aid demand for passenger cars. Auto shares had been underperforming the market before the Budget, and that it had no negative surprises triggered a rally.
What’s more, most auto companies reported strong sales numbers for February as customers advanced purchases to avoid paying higher prices on account of the expected hike in excise duty. This trend should continue for at least another month as far as four-wheelers are concerned, considering that new emission norms will be applicable from April, making vehicles even costlier.
Maruti’s domestic sales rose by about 20% on an annual basis. But they weren’t substantially higher compared with January sales, growing by 4.5%. Also, while car makers have been quick to raise prices after the hike in excise duty, they may not be able to do the same in April, when manufacturing costs will rise due to the new emission norms.
The total cost of a four-wheeler is expected to rise by 4-6%, but manufacturers may not be able to pass on the entire burden, especially coming on the back of the recent 2% hike. Even if they do raise prices by 4-6%, it still won’t take care of the inflation in raw material costs. As a result, margins will come under pressure in the next fiscal.
It’s for this reason that shares of four-wheeler manufacturers such as Maruti and Mahindra have underperformed the market in the past few months. Even after the post-Budget rally, they are around 12-14% lower compared with the 52-week high, while the broad markets are down less than 6% from their peak.
Write to us at marktomarket@livemint.com
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First Published: Wed, Mar 03 2010. 12 30 AM IST