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Auto companies ring up higher net sales, profits in March quarter

Semiconductor shortage and high commodity prices dent margins

automobile
Volume traction, along with regular price hikes, has resulted in revenue growth for the sector
Shally Seth Mohile Mumbai
4 min read Last Updated : May 30 2022 | 6:09 AM IST
Aggregate net sales and net profits of auto companies rose 12 per cent and 15 per cent, respectively, year-on-year in the quarter-ended March even as the chip shortage, a steep increase in raw material prices, and the demand slowdown facing a few segments have crimped margins.

Automakers expect margins to remain under pressure because the chip shortage is unlikely to be resolved anytime soon and may prevent them from leveraging scale.
 
A persistent inflationary trend will also continue to mount pressure.

Even as strong demand in the passenger vehicle market may help the industry cross 3.4 million units (last seen FY19) in FY23, “the semiconductor situation is still uncertain” and is a hindrance in tapping the full demand potential, Shailesh Chandra, managing director, Tata Motors Passenger Vehicles and Tata Passenger Electric Mobility, said in a post-earnings investor call on May 12.

Ajay Seth, chief financial officer at Maruti Suzuki India, expressed a similar sentiment.

“Supplies of electronic components continue to be unpredictable; they might have some impact on the production in FY23 as well.”

Net sales of Ashok Leyland, Eicher Motors, Escorts, Hero MotoCorp, Mahindra and Mahindra, Tata Motors (standalone), Maruti Suzuki, TVS Motor, and Bajaj Auto increased to about Rs 1.054 trillion from Rs 94,212 crore in the corresponding period a year ago.

They also rose by 13.4 per cent quarter-on-quarter, shows the data from Capitaline.
 
Though the aggregate margin of the auto companies showed a marginal improvement quarter-on-quarter, it fell to 15 per cent from 15.9 per cent in the year-ago quarter.
 
The companies witnessed decent volumes year-on-year as well as quarter-on-quarter in the fourth quarter of FY22, aided by improved supplies of semiconductors, said Mitul Shah, head of research, Reliance Securities.

Volume traction, along with regular price hikes, has resulted in revenue growth for the sector. However, higher commodity prices and other costs affected the operating margins during the quarter, resulting in a decline in net profit in the fourth quarter, he said.

“We expect margin pressure to continue in the first quarter of 1QFY23, while it would improve in 2HFY23E,” said Shah.

The managements of most companies, during the investor meets, called out a persistent increase in commodity prices as a factor that might impact profitability in the forthcoming quarters.

Prices of hot-rolled steel rose, for instance, nearly 92 per cent and those of cold-rolled steel were up 77 per cent in FY22.

“An area of concern is cost inflation, which is triggered now by the geopolitical situation,” said Niranjan Gupta, chief financial officer, Hero MotoCorp in the investor call after the March quarter results.

Hero will navigate inflationary pressure through price increases, cost savings, and broad-based portfolio growth including the premiumisation of certain models it has.
 
The recent government move to reduce import duty on certain raw materials used in making steel and a surcharge on exports was expected to cool steel prices to some extent.

Following recent developments, some brokerages such as CLSA have raised the earnings estimates of automakers. The impact will be seen only with a lag of a quarter.

Meanwhile, two-wheelers, which have seen a protracted slowdown, are showing early signs of recovery. But the overall volumes are far from satisfactory. The reduction in fuel prices has failed to lift retail demand so far. Improvement in cash flows in the rural economy due to rabi harvesting is supporting the demand revival to some extent, wrote Jinesh Gandhi, analyst at Motilal Oswal wrote in a recent research report.

The opening of schools and colleges next month may add heft to the recovery, he wrote.

Premium motorcycles above 150cc are facing chip shortages, leading to a waiting period of 15 days. The inventory in the system has normalised to 30-45 days against the average of 40-60 days during the last few months, he wrote.

Topics :Auto salesAutomakersTata MotorsAshok LeylandEicher Motors

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