Auto companies reported the biggest earnings surprise this results season, beating street estimates by a wide margin. All frontline stocks in this sector such as Maruti Suzuki India Ltd, Hero Honda Motors Ltd, Tata Motors Ltd and Mahindra and Mahindra Ltd (M&M) posted better-than-expected profit for the three months ended June.
Savings on raw material costs as the commodity price cycle bottomed out and higher price realizations helped achieve the best results in at least four quarters.
If there was any quibble about this performance, it was only that the majority of the gains came from the cost side, while revenues grew in single digits. But this may soon be a thing of the past, if these companies’ July sales numbers are an indication. Maruti, M&M and Hero Honda grew their sales by about 30%, while Tata Motors’s 17% increase in total volumes was well above expectations. The increase was not just restricted to passenger vehicles. Tractor sales grew strongly in what is usually not the growth season for this segment and trucks posted an increase for the first time in a year.
To be sure, lower sales in the year ago period is one of the key reasons for this percentage increase. But analysts say the so-called base effect doesn’t explain the full extent of the increase. The positive turn in consumer sentiment in recent months seems to be main factor driving the growth in auto sales. Auto manufacturers have capitalized on the situation with a number of new vehicle launches. For instance, M&M’s Xylo has a six-week waiting period. Sales should continue to grow at a decent pace in the near term, with the festival season kicking off on Wednesday with Hindu festival Raksha Bandhan. Traditionally, this period has seen high spikes, especially in two-wheeler demand.
Needless to say, the uncertainty related to the weak monsoon remains. In a worst-case scenario, this could derail growth, since rural demand has been the key to the robust performances of companies such as Hero Honda and M&M in the past year. The two companies sell at least half their vehicles to rural consumers. But thanks to rural employment programmes such as the National Rural Employment Guarantee Scheme, analysts say that rural income is relatively less dependent on agriculture, and could provide a cushion as far as rural demand is concerned.
Write to us at firstname.lastname@example.org