Mumbai: High input costs and foreign exchange losses eroded profits at Tata Motors Ltd, India’s largest auto maker by revenue, and Mahindra and Mahindra Ltd (M&M), the market leader in utility vehicles.

Tata Motors’ consolidated net profit, including UK subsidiary Jaguar Land Rover Plc, contracted 16% to 1,877.33 crore. It incurred a foreign exchange loss of 400 crore compared with a gain of 130 crore a year ago.

Even as sales of utility vehicles climbed, stand-alone net profit of M&M contracted 2% to 737 crore in the three months to September as raw material expenses rose one-third to 4,708 crore. Net sales during the period rose to 7,306 crore from 5,311 crore a year ago.

The drop in profit, the first in two years, took the Street by surprise and M&M’s stock dropped 5.73% to close at 790.40 on BSE.

Tata Motors, which announced earnings after market hours, closed at 177.90, down 3.8%. The BSE benchmark Sensex dropped 0.43%.

Executives at both companies were cautious in their outlook as a sliding rupee at home and a financial crisis in Europe, coupled with sluggish demand in India, threaten growth prospects.

“Interest rate increases frequently in the past, fuel price escalation and overall expectation of lower industrial growth and slowdown in the economy, all these may impact commercial vehicle demand," Tata Motors chief financial officer C. Ramakrishnan said.

Indian auto makers have been hit hard by rising costs and a series of interest rate hikes that have deterred new purchases in recent months. Car sales in September fell 24%, the biggest monthly fall in 11 years.

A file photo of Tata Motors chairman Ratan Tata.

Prices of key inputs such as aluminium and steel inflated raw material costs for both companies. While prices of hot-rolled coil surged 14%, aluminium rose 15% on the London Metal Exchange in the quarter.

In a conference call with analysts, Uday Phadke, president finance at M&M, said raw material expenses will rise further in the December quarter, although marginally, as the impact of the price rises kick in.

Ralph Speth, chief executive of Jaguar Land Rover, said the company remains optimistic about emerging markets such as China where it saw sales double, but is sceptical about Europe, which accounts for one-third of volumes.

Profits at Tata Motors’ domestic operations dropped as sales of passenger cars, including the Nano, took a hit. Net profit slumped to 102 crore from 433 crore a year ago.

Mahantesh Sabarad, senior analyst at Fortune Equity Brokers Ltd, attributed the drop in M&M’s profitability to a higher contribution of small commercial vehicles, which command a lower price than utility vehicles, in overall sales.

Profit was also dragged down by the 32 crore loss because of the fall in the rupee and adjustments in M&M’s external commercial borrowings, payable by 2016.

Some analysts, however, remain positive on M&M, among them Umesh Karne, analyst at Bric Securities Ltd. He expects the strong volume growth in M&M’s utility vehicles to continue on the back of new model launches and a diesel-driven portfolio.

Even as high petrol prices dented sales for most auto makers, sales of M&M’s utility vehicles, most of which are diesel-powered, expanded 14% to 47,523 units in the quarter. It also maintained its market share of 54% in the segment. Karne said he will upgrade the stock rating.

“Business confidence has weakened considerably this year. Investment outlays, as a consequence, are witnessing a significant moderation, which does not bode well for future growth," M&M said in a statement.

Reuters and Bloomberg contributed to this story.