Low-base effect to kick in, but higher raw material prices could spoil the show.
Top automobile makers Tata Motors, Maruti Suzuki, Mahindra & Mahindra, Hero Honda, Bajaj Auto, Ashok Leyland and TVS Motors together expect around a six-fold rise in net profit (536 per cent year-on-year) in the third quarter ending December 2009.
This will be on the back of a low base as these companies had suffered a severe setback in the December 2008 quarter due to the global liquidity crunch and rise in interest costs. In the third quarter of last year, Mahindra & Mahindra had reported a net profit of Rs 1 crore while Tata Motors had recorded a net loss of Rs 263 crore.
The projection is based on estimates by auto analysts for financial year 2009-10. Historically, automobile companies generate around 26 per cent sales and 28 per cent profits in the third quarter. For this study, we assumed that they have maintained this figure in this year’s December quarter as well. According to estimates, these top seven auto makers are expected to show a robust 55 per cent rise in net sales. Except for Hero Honda, the net profit of the remaining six is expected to rise over 100 per cent each.
However, the third-quarter performance may not be as good as the second quarter’s. Sales, expected to rise around 55 per cent over the December 2008 quarter, will be lower by around 1 per cent over the sequential quarter.
However, the expected year-on-year growth in net profit (536 per cent) will be 12 per cent lower than the September 2009 quarter figure. Already, month-on-month sales of top auto makers are down 7.5 per cent in October 2009, mostly due to a 11.5 per cent decline in Hero Honda’s month-on-month sales. Only cars, tractors and light commercial vehicles have posted a rise in month-on-month sales.
More From This Section
RL Narayanan, an analyst at Bonanza Portfolio, expects auto makers to show a flat quarter-on-quarter growth. He expects volumes to peak in the fourth quarter due to new launches in the New Year. In the second quarter ended September 2009, the performance of automobile companies was driven by volumes and higher net realisation due to lower excise duty. The recent increase in commodity prices could lead to some squeeze on margins, he said. The things to watch out for are movement of commodity prices and roll-back of the excise duty cut.
The benefits of lower commodity prices year-on-year and cost efficiencies had boosted the companies’ second-quarter margins. Profit margins from core operations rose 728 basis points, largely due to savings in production costs and decline in prices of key raw materials. The cost of production as a percentage of sales declined from 93.9 per cent a year ago to 86.64 per cent in the second quarter ended September 2009. Similarly, the cost of raw materials to sales declined from 75.06 per cent to 69.77 per cent.
Ashok Leyland expects a 59 per cent rise in net sales and a 363 per cent rise in net profit in the third quarter. The company anticipates sales to grow 65 per cent due to the low-base effect. The company’s Uttaranchal plant will be operational in the fourth quarter and it expects an excise duty benefit of Rs 60,000 per vehicle, which is 6 per cent of the average cost of the vehicle, says an auto analyst at Edelweiss Research.
Bajaj Auto expects to repeat its second-quarter profit growth in the third quarter on the back of a robust growth in volumes. The company expects an increase in input costs in the coming quarters, but increase in volumes from recent launches could partially offset this. The company expects to export 800,000 units.
Hero Honda expects to repeat its profit performance in the third quarter. However, increasing competition in the 100cc segment would be a threat to volumes. Maruti Suzuki’s profit is likely rise sharply on the back of strong volume growth. The company sees good demand in the domestic market and is aiming to export 130,000 units by increasing sales outside Europe. The operating margin, however, is expected to be under pressure due to higher commodity prices and strengthening of the yen.
| NUMBER GAME | ||||||
| Company | Net sales; qarter ended | Net profit; qarter ended | ||||
| Dec 2008# | Sep 2009# | Dec 2009* | Dec 2008# | Sep 2009# | Dec 2009* | |
| Ashok Leyland | 1,000.85 | 1,577.68 | 1,589.10 | 18.87 | 88.61 | 87.40 |
| Bajaj Auto | 2,004.75 | 2,793.22 | 2,975.70 | 164.27 | 402.83 | 395.20 |
| Hero Honda | 2,874.04 | 4,040.10 | 3,957.00 | 300.42 | 597.14 | 564.40 |
| M & M | 2,519.25 | 4,465.00 | 4,172.60 | 1.20 | 702.94 | 612.30 |
| Maruti Suzuki | 4,537.12 | 7,080.67 | 7,080.60 | 213.57 | 570.00 | 620.10 |
| Tata Motors | 4,758.62 | 7,924.07 | 7,728.20 | -263.26 | 729.14 | 464.50 |
| TVS Motor | 852.82 | 1,115.41 | 1,155.70 | -0.96 | 24.55 | 17.50 |
| # reported sales and net profit on standalon basis Figures in Rs crore * Estimates based on analysts reports from Anand Rathi, Citi group, Enam, Emkay Research, IDFC-SSKI, Motilal Oswal | ||||||
Tata Motors expects pressure from commodity and component prices. The company has effected a 2.5 per cent rise in commercial vehicle prices. Mahindra & Mahindra is expected to show a net profit of Rs 612 crore, lower than the Rs 703 crore earned in the second quarter. In the second quarter, higher operating margins were aided by lower input costs and lower exchange rate losses. Going ahead, high margins are not sustainable as input costs have started to rise. The management is cautious on the outlook for the tractor business in the second half of 2009-10 due to drought.