Low base, recovery in demand to drive up auto firms' Q4 earnings

Aided by a lower base because of last year’s lockdown and recovery across segments, auto companies are expected to post average revenue growth upwards of 35 per cent year-on-year (YoY) in the March quarter (Q4). Though wholesale numbers declined, compared with the festive season sales, factory dispatches remained strong despite multiple price hikes and lower discounts. With the overhang of supply chain issues and the marriage season coming up, automakers looked to build up inventory and this resulted in double-digit volume growth.   

Among two-wheelers, sales of TVS Motor and Eicher Motors were volume led, while for the larger two-wheeler makers it was an equal mix of price hikes and volumes. Recovery in the African and Latin American markets should help exporters post better growth than the domestic market. 

Growth in passenger vehicle (PV) sales was robust because of the low base, preference for personal mobility, and new launches, including four new sports utility vehicles in Q3. Tata Motors’ domestic PV sales growth was strong, helping it move to the third spot in the segment. Maruti’s volume growth, too, was resilient at 28 per cent. While tractor sales have moderated, commercial vehicle sales have seen sequential and YoY growth in volumes.

The key concern for auto companies is pressure on profitability on account of rising raw material costs. Given the sharp rise in prices of steel, aluminium, copper, rubber, and precious metals, most companies are expected to report a fall in gross margins both on sequential and year-ago levels. 

Though companies have announced price hikes and initiated cost cutting measures, these may not be enough to maintain margins. 

The trend of pressure on profitability across segments is expected to continue in the next couple of quarters. While reported earnings growth is not uniform across key companies, given base quarter issues (M&M, Tata Motors, Ashok Leyland reported losses), earnings growth across the board is strong on the back of operating leverage and improving product mix. Companies with higher export mix are also well placed. 

The volume outlook, however, is muted, given the second wave of Covid-19 and the resultant restrictions on travel. While this remains a dampener for consumer sentiment, analysts at ICICI Securities believe that rising vehicle prices, ranging from 4-8 per cent across categories, due to higher input cost inflation, too, are a headwind. 

They expect new vehicle demand for PVs and two-wheelers to soften with the upcoming marriage season demand (North India) remaining key for mass market segments that carry higher inventories. Tractor sales are expected to be resilient, given the expectation of a normal monsoon. The sector could face twin problems of muted volume growth worsened by rising raw material inflation.