Graphic: Prajakta Patil/Mint
Graphic: Prajakta Patil/Mint

Auto firms Q3 results: A blip in growth as demonetisation cripples sales

A higher raw material cost effect is bound to weigh on profit margins in the current and forthcoming quarters, unless price hikes and sales offset the same

Auto firms’ performance in the December quarter was under stress on account of the ban on high-value banknotes that crippled sales for almost half the quarter. Net revenue of leading auto firms, therefore, declined slightly from the year-ago quarter, with the biggest impact being on two-wheelers.

Save for premium motorcycle manufacturer Royal Enfield, which bucked the trend, both Hero MotoCorp Ltd and Bajaj Auto Ltd sold fewer vehicles. This, in turn, led to a sales year-on-year decline. However, TVS Motor Co. Ltd’s mopeds fared well, lifting overall sales slightly.

Commercial vehicle (CV) firms presented a divergent trend. No. 2 player Ashok Leyland Ltd’s sales bumped up significantly. Realization and profits rose. The CV market leader Tata Motors Ltd, on the other hand, posted weak growth. Its passenger car segment was the saving grace on the domestic front.

The country’s largest car manufacturer Maruti Suzuki India Ltd saw dull growth. This is because the firm has a significant exposure to rural markets with entry-level cars. This segment did badly. Fortunately, the higher-end segment, comprising utility vehicles along with new launches, compensated for the drop in sales of entry-level cars.

The biggest takeaway is that most firms maintained operating margins at cushy year-ago levels despite the odds. A higher inventory of unsold vehicles masked cost increases. Further, other expenses and staff costs were trimmed too. But then, higher inventory of finished goods offset the material cost increase and lifted profitability. This trend is unlikely to continue in the quarters ahead. Higher material costs could cap margins.

What stuck out as a sore thumb was Tata Motors. Its results were dismal, thanks to dismal global sales and operating performance by its UK subsidiary and cash cow, Jaguar Land Rover Automotive Plc.

That said, in spite of the sudden blip, analysts feel demonetisation blues are already behind the sector. All eyes are now on a sales revival, especially in two-wheelers and CVs, driven by the race to buy vehicles before the new and more expensive vehicles, compliant with the new emission norms (BS-IV), hit the market in April.

Here again, in the two months of the March quarter already gone by, the “pre-buying" story has not been impressive. Sales continue to be weak across most vehicle categories.

Further, the higher raw material cost effect is bound to weigh on profit margins in the current and forthcoming quarters, unless price hikes and sales offset the same. Of course, valuations are fair at the current stock prices. A robust pick-up in sales, along with the ability of firms to pass on any cost pressures to customers, will be key in the coming quarters.