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Robust volumes, low base, to drive up earnings at auto firms

Robust volumes, low base, to drive up earnings at auto firms

New Delhi: Strong festive season sales when compared with last year’s low base and demand spurred by new models have brought cheer to automakers—likely to be reflected in their earnings results.

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Car, truck and two-wheeler makers are on track to report improved earnings for the quarter ended 31 December.

Analysts say the low base, a result of poor demand because of the financial crisis, will make for better year-on-year on comparisons.

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Commercial vehicle makers —Tata Motors Ltd and Ashok Leyland Ltd—would show the most improvement while profits at Bajaj Auto Ltd and Maruti Suzuki India Ltd are expected to more than double, they said.

Commercial vehicles sales rebounded 73% to 130,000 units over the previous year.

Five brokerage firms polled by Mint—CLSA Asia Pacific, Angel Securities Ltd, Centrum Broking Ltd, IDFC-SSKI Research Ltd and BNP Paribas Securities India Ltd—expect the auto firms to show a strong margin recovery driven by retail demand.

Ashok Leyland’s net profit is estimated to jump to Rs89.72 crore from Rs18.87 crore earlier; Tata Motors, which sells more than half the trucks and buses sold in the country, is likely to turn a profit of Rs75.84 crore against a loss of Rs263 last year.

Earnings at car and bike market leaders, Maruti Suzuki India and Hero Honda Motors Ltd, aided by new launches and stout rural sales, are estimated to be impressive.

Maruti Suzuki, which makes half the cars sold in the country, is expected to report a 174% jump in net profit over a year ago to Rs587 crore. Analysts see Hero Honda’s profit at Rs515 crore, a 71% rise.

Jinesh Gandhi, an analyst at Motilal Oswal Securities Ltd, says that while profit margins may come off their peaks, a reversal is not likely because of a relatively higher pricing power, cost controls and more contribution from factories.

But analysts are cautiously optimistic in their outlook for the sector as a likely roll back in the fiscal stimulus and rising interest rates may dampen demand.

Utility vehicle maker Mahindra and Mahindra Ltd, which sells two out of three such vehicles sold in India, is estimated to turn a profit of Rs474 crore. Bajaj Auto, after a significant decline in volume in the second half of fiscal 2009 and a consequent revival in sales on the back of new models, is expected to show a 179% rise in net profit to Rs458 crore.

Still, because of the hike in prices of commodities such as steel, copper and aluminium, analysts expect operating margins for the firms to decline when compared with the preceding three months.

In a 6 January report, analysts Deepak Jain and Sumiran Mehta at Edelweiss Securities Ltd, wrote that they expect Ebitda margins to decline marginally quarter-on-quarter. Ebitda, or earnings before interest, taxes, depreciation and amortization, is a measure of a firm’s core performance.

Carmakers, facing a slew of launches, may not be able to increase prices, but commercial vehicle makers may pass on the burden of hardening commodity prices, they said.

Contracts at most auto firms will be re-negotiated and prices are expected to rise from the third quarter on account of higher steel and base metal prices.

“Our estimates now factor in a 100-120 basis points increase in material costs in the second half of fiscal ‘10," said Gandhi of Motilal Oswal. A basis point is one-hundredth of a percentage point.

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