Home / Markets / Mark To Market /  Weak sales, aggressive discounts to hit auto sector’s profit margins in Q3

After a double-digit drop in the preceding five quarters, the decline in auto sales moderated in the December quarter (Q3). Of course, performance differed across segments. Passenger vehicle sales led by market leaders Maruti Suzuki India Ltd and Hyundai Motor India Ltd were flat.

But commercial vehicle (CV) sales disappointed, with a 22% drop year-on-year, and so did two-wheeler sales, which fell 13% from a year ago. While the macroeconomic slowdown and higher axle-load norms weighed on CV demand, two-wheeler sales fell due to rural distress and rising unemployment.

Further, high discounts and marketing offers were doled out by all manufacturers to clear inventory of BS-IV vehicles. This is bound to impact average realization in Q3. Hence, aggregate revenue may contract by 5-7% year-on-year, but lower than the 12-15% decline in Q2.

The silver lining in the otherwise foggy outlook is that commodity prices have been benign, especially those of steel, aluminium and rubber, which should boost gross margins.

A report by Maybank Kim Eng Securities India Pvt. Ltd said higher discounts for clearing BS-IV stock coupled with an increase in operating costs to migrate towards BS-VI emission technology will drag Q3 margins down on a year-on-year basis.

But things will be better from a quarter-on-quarter perspective. Motilal Oswal Financial Services Ltd said: “The Ebitda margin for our universe (ex-JLR) will improve sequentially from the lows of Q2 FY20 after declining for five straight quarters to 11.3%, driven by favourable commodity prices and operating leverage following sequential improvement in volumes." Ebitda stands for earnings before interest, tax, depreciation and amortization.

Margin performance is expected to vary across firms. For instance, improving sales in China and the US, will aid Jaguar Land Rover Ltd’s (Tata Motors Ltd’s subsidiary) profitability. But, weak CV sales will drag its consolidated margins down. In the two-wheelers segment, Bajaj Auto Ltd’s exports will alleviate the pain of the domestic sales slowdown due to the high price of BS-VI vehicles.

Be that as it may, auto companies are continuing to battle the challenge of lowering the inventory of BS-IV vehicles and simultaneously bracing for the BS-VI emission era (from 1 April). Consumer behaviour in terms of advance purchases to avoid costlier BS-VI vehicles is uncertain, making the sales outlook uncertain for Q4 and the first two quarters of FY21.

While the Nifty Auto index had begun on a recovery path between July and November last year, it has underperformed the benchmark Nifty index in the last two months. This is not surprising given that hopes of a sustained recovery post-festive season hit a roadblock.

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