The auto industry has hit a speed-breaker over the past year, as demand started decelerating. The fourth quarter saw most commodities, except rubber, become dearer marginally on account of a weak rupee. This added to the pressure on profitability. This trend was reflected in the financials of auto companies in Q4. Even though the year saw nearly 20 per cent growth in revenues, profitability remained under pressure. Barring Tata Motors, operating profit and net profit grew at a much slower pace. Maruti Suzuki and Ashok Leyland led others on margin decline in Q4. Maruti’s operating margin fell 268 basis points year-on-year, while Ashok Leyland saw its margin decline by 242 basis points to 11 per cent.
So, what’s in store for FY13? Analysts believe the first half of the year is likely to be muted, as is evident from the May sales data. Most passenger car makers have reported muted numbers, including Maruti. Except utility vehicles and light commercial vehicles, auto sales have remained weak in the month of May. Analysts say medium and heavy commercial vehicle sales of Tata Motors stayed weak due to pre-buying in Q4 and softer freight rates. According to Edelweiss, “After declining 10-21 per cent during the past three months, Mahindra and Mahindra’s (M&M) domestic tractor sales have reported a flattish 18,000 unit sales in May, indicating that decline in demand has bottomed. We expect a five per cent growth in FY13.”
Analysts say the volume guidance given by most auto companies is rather muted. Sharekhan says most firms expect economic revival to coincide with the interest rate reversal and easing of inflation towards the second half of FY13. This would positively impact demand. While the market expects Bajaj Auto to scale down its FY13 guidance of five million units if demand does not pick up, Maruti Suzuki is expected to lead in terms of earnings growth, primarily due to the low base of FY12. However, if economic revival does not happen and rates don’t come down meaningfully, the sector could come under selling pressure.