Auto firms may report higher profit due to steady rise in sales

Auto firms may report higher profit due to steady rise in sales

New Delhi: Buoyed by a steady and sustained increase in sales, auto companies are on track to report higher revenue and profit numbers for the quarter ended 30 September, according to analysts polled.

IIFL Capital Ltd expects makers of cars, trucks and two-wheelers “to deliver stellar Q2 (second quarter) results", with profit growth averaging at about 75% over the same period a year ago.

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The higher profit is on account of better sales, softening commodity prices and improved financing, according to five brokerage firms polled by Mint—Prabhudas Liladhar Pvt. Ltd, Sharekhan Ltd, Motilal Oswal Securities Ltd, Angel Broking Ltd and IIFL Capital.

Commodity prices that had peaked in the July-September quarter of 2008-09, fell steadily between October and December 2008. Auto firms started gaining from this decline in the first quarter ended 30 June.

These savings would result in margins improving by 250 basis points, estimates Mahantesh Sabarad, an analyst with Centrum Broking Pvt. Ltd. A basis point is one-hundredth of a percentage point. Raw materials typically account for 20% of the revenues for an auto maker, with steel making up a little over half of that.

The Society of Indian Automobile Manufacturers (Siam) had indicated in September it may raise its growth forecasts for the current fiscal year. Siam is to report sales numbers for September on Tuesday.

Maruti Suzuki India Ltd, which makes one in every two cars sold in the country, continued to outsell its peers in the quarter gone by. The firm’s sales have increased by 16% so far this fiscal year, outpacing the industry’s growth rate of 9.5%.

Maruti Suzuki’s exports, which have benefited from the scrappage schemes announced by several European nations, rose to 11,712 units in September, an increase of 85%. It expects the export momentum to last till the first quarter of next year.

Towards the end of fiscal 2009, some countries such as Germany, Italy and France announced scrappage benefits on old cars, reviving car sales in these markets.

Profit per vehicle is also seen improving. Last year, slowing car sales resulted in manufacturers fighting debilitating price wars to gain traction. With sales improving now, many car makers have been able to pull back discounts.

As a result, Prabhudas Liladhar expects Maruti’s net profit per vehicle to jump to Rs22,627 in the September quarter from Rs15,632 a year before. Its net profit is expected to rise 90% to Rs564.10 crore.

Mahindra and Mahindra Ltd (M&M), India’s top tractor and utility vehicle maker, should get a leg up from the rising sales of tractors, analysts said. Its tractor sales rose 45.4% to 38,597 units in the September quarter, undeterred by the weak monsoon. In comparison, M&M’s car sales rose by a relatively modest 17.8% to 70,798 units.

Unlike in the previous quarters, analysts say the growth in demand is here to stay. A key reason for their optimism: Rising sales of large trucks, which is a leading economic indicator.

This is likely to benefit Tata Motors Ltd, the country’s largest truck maker, which typically earns two-thirds of its profit from truck sales and the rest from cars.

The company saw sales of large trucks increase starting July, it said in a recent press statement.

Tata Motors’ second quarter net profit is forecast to increase 35% to Rs469.08 crore.

Rival Ashok Leyland Ltd still has some catching up to do. The company was hit hard by the slowdown as it relied completely on medium and heavy trucks. It does not have a presence in the small truck segment, sales of which started recovering in the first quarter of calendar 2009.

While Tata Motors has seen an increase in the sales of heavy trucks, Ashok Leyland is yet to post an increase. Analysts predict a modest 13% growth in the firm’s quarterly profit to Rs66 crore, mainly on softening commodity prices.

The latest quarter also marked the first time Hero Honda Motors Ltd exceeded a million units in sales. India’s largest two-wheeler firm has always been strong in rural areas, which make up 40% of its sales. This, coupled with a bump in sales on account of the festive season, has resulted in it selling 1.18 million units, up 21.8%, in the September quarter. Its net profit is likely to increase 75% to Rs539.72 crore.

Two-wheeler maker Bajaj Auto Ltd, which depends on financing to boost sales, had seen volumes fall as banks and financiers had stopped offering loans for buying two-wheelers because of the downturn. But with the recent improvement in financing and better profit margins, Bajaj is likely to more than double its quarterly profit to Rs376.70 crore, analysts said.

The improved performance in the auto sector has not gone unnoticed by the markets. In the last quarter, the 14-share auto index of the Bombay Stock Exchange outperformed the benchmark Sensex index.

The auto index ended Monday at 6,544.91 points, up 41.7% since 1 July . In the same period, the Sensex has gone up 16.25% to 17,02.67 points.

Graphics by Ahmed Raza Khan / Mint