Mark to Market | Stable profit outlook for auto component firms2 min read . Updated: 10 Oct 2012, 12:35 AM IST
Falling commodity prices and an appreciating rupee promise more stability for profitability
Shares of large auto component firms have outperformed the broad market since early 2012. Robust growth of auto makers has translated into revenue expansion for component makers over several quarters.
In the September quarter, sales volumes are expected to hit a bump. Those with higher supplies to the original equipment (OE) segment than to the replacement market, companies such as Bosch Ltd and Bharat Forge Ltd, are likely to be impacted more. While OE demand softened in the past three sequential quarters, inflationary pressures led to lower-than-expected offtake in the replacement market, too. Few segments, including tyres and batteries, may be exceptions posting a sales growth of around 15-25% from a year earlier.
However, the key factor to look for is profitability. Falling raw material prices, after two years of soaring commodity prices, should shore up company profits. In its September quarter preview report, Prabhudas Lilladher Pvt. Ltd has indicated that the raw material index for the sector is down by 4% when compared with the March quarter. The index gives a 45% weightage to steel, 20% to aluminium, and 15% to plastics and polymers. But the impact of this decline on their performance may not reflect in the September quarter results, but in subsequent quarters.
But falling commodity prices and an appreciating rupee (seen in the last few weeks) promise more stability for the profitability of component makers. In the last two quarters, the impact of falling material prices was offset by a volatile rupee in relation to the dollar.
The biggest beneficiaries of falling commodity prices during the September quarter will be tyre and battery makers. For example, Apollo Tyres Ltd could post a 300-400 basis points expansion in operating margin on account of a slide in rubber prices. Those like Exide Industries Ltd that posted dismal earnings in the year-ago period could even double margins, again on account of lower lead prices.
However, most component makers with higher proportion of OE sales would portend a stable profit margin outlook. One must watch out for companies with greater exposure to overseas markets, mainly Europe, such as Motherson Sumi Systems Ltd, which may post lower consolidated operating margin as the operations in overseas territories are yet to stabilize.
This explains the rally in stock prices of component firms. However, the moderation in fiscal 2013 auto sales volumes has dampened the sentiment, as it is likely to hit demand for components. A kicker for the sector would come from a cut in retail bank lending rates, which will boost OE sales, and eventually result in higher volumes for component makers.