New Delhi: As a result of significant decline in sales and increase in commodity costs and discounts, the profitability of automobile manufacturers have come under significant pressure in the last quarter of FY19, as most of them are looking to cut costs in several areas of their operations in FY20.
The country’s largest two-wheeler and passenger vehicle manufacturer, Maruti Suzuki India Ltd and Hero MotoCorp, have reported substantial contraction in operating margins in the quarter ended March 31, indicating a tough FY20.
Maruti Suzuki’s net sales or revenues were down 0.7% to ₹20,737.5 crore in Q4, while net profit was down 4.6% year-on-year to ₹1,795 crore. The operating or earning before interest, tax, depreciation and amortisation (EBITDA) margins contracted substantially by 350 basis points to 10.5% during the period.
Ajay Seth, executive director, finance, Maruti Suzuki, said the company will try to cut costs in different aspects of its operations such as sourcing of materials or parts from vendors, employee cost and other overheads to improve profitability.
“When it comes to margins, this quarter is not comparable to the corresponding quarter, given the headwinds we have witnessed due to decline in sales and increase in commodity costs," according to Seth.
“We believe that Maruti’s cost-control measures and overall inventory reduction at the industry level would result in lower discounts and bring back pricing power for passenger vehicle makers, going forward. This would help MSIL reach closer to its average EBIDTA margins of around 14% going forward," analysts of Reliance Securities said in a report dated 2 May.
For the country’s largest two-wheeler manufacturer Hero Moto Corp, the last quarter of FY19 was tough considering that the company had to undergo production cuts to reduce inventory with dealers.
As the revenue during the period decreased 7.9% y-o-y to ₹7,885 crore and net profit fell 25.5% to ₹730 crore, operating margins of the company contracted by 240 basis points to 13.6% from 16% in the year-ago period.
“When you sell less vehicles and your costs are fixed, margins will be under pressure. This financial year we are expecting some pre-buying that will help in the second half of the financial year," a senior executive of Hero MotoCorp said.
Bangalore-based TVS Motor Company also reported a 19.2% y-o-y decline in net profit to ₹133.8 crore, while net sales increased 9.2% y-o-y to ₹4,387.6 crore on account of a meagre 2% increase in total sales.
“We believe that the constant fall in market share and higher inventory would force HMCL to take pricing action. We believe that this situation would encourage the management to take pricing action on select models and also restrict it to pass on full cost escalation of BS-VI in future. Moreover, inventory correction would impact wholesale volumes for FY20. We expect negative impact of competition to continue on HMCL’s margin and profitability," the analysts of Reliance Securities said in the report.