Q4 results of auto firms: BS-III inventory, input price hurt margins
Auto firms did well in the March quarter, given the challenges of demonetisation and the new Bharat Stage-IV (BS-IV) emission norms. That is in addition to the rising input costs over the past four quarters. So, while revenue growth was tepid in most cases, operating performance was a mixed bag due to the varying impact of these factors on each firm.
Passenger car companies, specifically Maruti Suzuki India Ltd (MSIL), posted strong sales growth. The segment, which is already in sync with the new emission compliance norms, was least impacted. MSIL’s robust 20% year-on-year (y-o-y) growth in revenue and 16% in net profit proved this.
However, two-wheeler makers, mainly Hero MotoCorp Ltd, were stuck with huge inventory. The same was true of heavy commercial vehicles manufacturers such as Ashok Leyland Ltd and Tata Motors Ltd.
Most vehicle manufacturers were just coping with the adverse impact of the November ban on high-value banknotes, which had hurt sales in the December quarter. Weak sales and a steady rise in commodity prices translated into a 250-300 basis points (bps) increase in raw material cost as a percentage of sales. And then, the new emission norms were enforced that led to significant inventory pile-up in the March quarter. Most commercial vehicle and two-wheeler makers, therefore, had to offer steep discounts or incur expenses to alter vehicles. Hence, both gross and operating margins were hurt across firms. One basis point is one-hundredth of a percentage point.
In other words, the March quarter performance had surprise elements due to regulatory issues. However, the fact that the economy’s fortunes are being driven by consumption rather than capital expenditure is likely to rank sales growth of passenger vehicles and two-wheelers higher than commercial vehicles. Raw material costs are likely to remain elevated, be it steel, copper or rubber.
So, higher sales volume is the only weapon for auto makers to beat the pressure on profitability. That said, for most vehicles, the goods and services tax (GST) is unlikely to hurt performance as the rates are neutral. From an investor perspective, the only issue is that barring some intermittent dip in stock prices when news of emission norms or the GST made headlines, the BSE Auto index is on a roll. More often than not, valuations, that currently factor in the positives of sales growth, race ahead of earnings.