The automotive sector will kick off the new financial year with weak first-quarter earnings, hit by subdued demand and rise in commodity costs. Barring a few companies earnings for most others will be disappointing.
With the exception of utility vehicles, three-wheelers and scooters, all other segments reported moderating to negative sales trends during the first quarter ended June.
Passenger cars reported a fall of 1.4 per cent to 475,000 units. Growth of medium and heavy commercial vehicles came down 14.5 per cent to 71,000, less than half the growth reported by the segment in the past financial year.
“We estimate a six per cent decline in net profit for auto companies in our coverage universe, largely led by a sharp fall in consolidated profit of Tata Motors. We expect positive surprises from Mahindra & Mahindra and Exide Industries, and negative surprises from Ashok Leyland and Bharat Forge,” a report by Kotak Institutional Equities said.
India’s biggest automotive company, Tata Motors, will likely report a flattish Ebitda (earnings before interest, taxes, depreciation and amortisation) margin even as its standalone operations will likely to slip into losses due to increase in steel prices and low retail demand for its cars.
Maruti Suzuki will feel the impact of a shutdown in production due to a fire at one of its vendors followed by advancement of a maintenance shutdown.
“Royalty expenses are likely to increase as percentage of sales on a quarter-on-quarter basis due to appreciation in yen versus the rupee. We estimate net profit to rise by six per cent year-on-year in 1QFY17 led by higher other income,” the Kotak report said.
The trend is similar for the motorcycle segment, where, after strong marriage-season April sales, demand slowed in May and June. The segment reported a growth of slightly under nine per cent for the quarter to 2.95 million units. Scooters were an outperformer once again with growth of 27 per cent and sales of 1.3 million units.
“Two-wheeler volumes moderated during May-June post strong marriage-season April sales. But new launches continued to drive motorcycle and scooter volumes. We expect TVS’s margins to improve 110 bps (basis points) quarter-on-quarter driven by operating leverage and a higher proportion of moped sales. Bajaj Auto would post a 50bps margin decline due to adverse product mix while Hero MotoCorp will have flattish margins,” said a report from Religare Institutional Research.
While the Seventh Pay Commission announcement will likely spruce automotive volume uncertainties over commodity prices, diesel policy adopted by states and safety norms by enforced by the Centre may play spoilsport.
“The rise in raw material prices (such as rubber and steel) is leading to margin pressures for automakers, which is expected to push them to increase vehicle pricing. As automakers look to expand offerings to cater to the evolving consumer demand in terms of product features and experience, we expect increased investments to meet the new safety and vehicle crash testing norms and the upcoming BS VI norms,” said Rakesh Batra, partner and national leader, automotive sector at EY.