 "Auto sector: Earnings downgrades begin on rain forecast")
Weak monsoon forecasts have cast a shadow on the automobile sector’s nascent recovery. Analysts have started cutting earnings estimates, as volume growth might be crimped. In the first two months of the current financial year, volumes of passenger and commercial vehicles have grown at a healthy clip, while two-wheeler volumes remained muted. If the gross domestic product growth does not pick up along expected lines and rains are deficient for a consecutive year, the sector's recovery would be impacted.
HDFC Securities says while passenger vehicles reported robust volume growth in May, demand for two-wheelers (driven by scooters) seems to be showing signs of moderation.
Rural markets account for a significant part of sales for players like Mahindra & Mahindra (M&M), Maruti and Hero. Other than Tata Motors and Maruti, volumes of other OEMs (original equipment manufacturers) are expected to be impacted negatively on deficient rains. Companies focused on urban markets would do better. Tata Motors and Maruti are relatively better placed among domestic automakers.
Two-wheeler companies are expected to remain under some stress, as demand is likely to be muted. Hero's volumes in May declined five per cent over a year to 569,876 units, due to continued contraction in rural sales. Analysts expect Hero to report a volume growth of six per cent in FY16. However, this would be subject to a normal monsoon. The company is planning to launch two new scooters in FY16, which it hopes will help boost sales.
Despite this, analysts have cut Hero's earnings estimates for FY16, as volume growth estimates have been cut. TVS has also disappointed the market. Against expectations of double-digit growth, it delivered a six per cent volume growth in May.
Bajaj Auto is expected to fare better this year, as it has improved its market share over the past two months, thanks to launches in the entry segment. IndiaNivesh expects Bajaj to report earnings to grow at a compound annual growth of 20 per cent over FY15-FY17. Tractors and utility vehicles would be worst hit if monsoons are deficient. M&M is hoping to see recovery in tractors and utility vehicles in FY16 but these estimates could also be revised downwards if rural stress persists.
HDFC Securities says while passenger vehicles reported robust volume growth in May, demand for two-wheelers (driven by scooters) seems to be showing signs of moderation.
Rural markets account for a significant part of sales for players like Mahindra & Mahindra (M&M), Maruti and Hero. Other than Tata Motors and Maruti, volumes of other OEMs (original equipment manufacturers) are expected to be impacted negatively on deficient rains. Companies focused on urban markets would do better. Tata Motors and Maruti are relatively better placed among domestic automakers.
Two-wheeler companies are expected to remain under some stress, as demand is likely to be muted. Hero's volumes in May declined five per cent over a year to 569,876 units, due to continued contraction in rural sales. Analysts expect Hero to report a volume growth of six per cent in FY16. However, this would be subject to a normal monsoon. The company is planning to launch two new scooters in FY16, which it hopes will help boost sales.
Despite this, analysts have cut Hero's earnings estimates for FY16, as volume growth estimates have been cut. TVS has also disappointed the market. Against expectations of double-digit growth, it delivered a six per cent volume growth in May.
Bajaj Auto is expected to fare better this year, as it has improved its market share over the past two months, thanks to launches in the entry segment. IndiaNivesh expects Bajaj to report earnings to grow at a compound annual growth of 20 per cent over FY15-FY17. Tractors and utility vehicles would be worst hit if monsoons are deficient. M&M is hoping to see recovery in tractors and utility vehicles in FY16 but these estimates could also be revised downwards if rural stress persists.