Auto firms seen reporting strong revenue in Q3 but margins may remain under pressure
Due to increase in input prices, some automobile manufacturers may continue to see further contraction in the margins
Mumbai/New Delhi: Automobile manufacturers are expected to report strong revenue and profit growth in the third quarter of the current fiscal year, boosted partly by the favourable effect of a low base in the year earlier quarter when demonetization was announced.
Due to increase in input prices, some manufacturers may continue to see further contraction in the margins.
Prices of major commodities such as steel, aluminium, lead and copper have increased 9.29% during the period and most manufacturers did not pass them on to customers.
As discounts across segments were very high, this will also have an impact on the realization per unit.
According to five brokerages—Motilal Oswal Securities Ltd, Kotak Institutional Equities, Edelweiss Securities Ltd, BOB Capital Markets Ltd and Emkay Global Financial Services Ltd—Ashok Leyland Ltd, Eicher Motors Ltd, Tata Motors Ltd and Mahindra and Mahindra (M&M) Ltd will report strong growth in revenue and at the operating level because of improvement in sales due to recovery in the rural demand and low base effect of demonetization.
On the other hand, Hero MotoCorp Ltd, the largest two wheeler manufacturer in the country, will report a muted quarter because of higher input cost and product discounts that will impact its operating margin.
Overall, this quarter saw strong volume growth across segments as the low base effect of demonetization helped. Also on the back of two consecutive good monsoons, the rural market has also been recovering, which has helped increase motorcycle sales especially in the economy segment. Due to the introduction of mandatory air-conditioned cabins in heavy and medium commercial vehicles from January, fleet owners have bought vehicles in November and December to avoid paying higher prices from January.
The country’s largest carmaker Maruti Suzuki India Ltd is expected to report revenue increase by 14% year on year in the third quarter, on the back of 11% y-o-y volume growth and 3% y-o-y increase in realizations due to better product mix (higher Baleno and Brezza sales), according to a report published by Hitesh Goel, an analyst of Kotak Institutional Equities.
While Ashok Leyland’s revenue is estimated to improve by 52% y-o-y in the third quarter led by 42% y-o-y volume growth and 7% y-o-y increase in realizations due to better mix (greater mix of higher tonnage vehicles), according to the same report. On the margin front, higher input cost and discount levels will continue to have an impact.
According to a note published by analysts at Edelweiss Securities, Bajaj Auto Ltd is expected to report the strongest margin expansion of 100 basis points (bps) while the operating margin of Hero MotoCorp Ltd, Mahindra and Mahindra Ltd and Maruti Suzuki India Ltd to decline quarter on quarter by 130bps, 170bps and 90bps, respectively, due to lower volumes and seasonality.