The automobile industry is expected to do well in the year’s first quarter, ended June, but the growth in sales and profits may not be as good as in the previous four quarters, due to a higher base effect.
The results’ preview by eight broking firms estimated that seven auto makers are expected to post a 40-plus per cent growth in sales, operating profit and net profit in the first quarter. The rise in input costs is likely to affect profit margin by 50-100 basis points, say analyst from the eight broking houses.
In a nutshell, the scope for earnings surprises in the first quarter is limited, with company-specific performance likely to drive up the growth rate. Ashok Leyland is expected to be a big outperformer, while Tata Motors is geared up for higher growth in revenue and profit. Bajaj Auto and TVS Motors are expected to outperform the motorcycle leader, Hero Honda, with healthy growth in sales and profit. Maruti Suzuki and Mahindra & Mahindra are expected to show 25-30 per cent growth in sales and profit.
Demand strong
Demand is strong and continues to benefit from an improving job outlook and improvement in farm income and economic recovery. Auto analysts say the inventory level for cars and two-wheelers was considerably lower than the three to four weeks of last year. Operating margins are under pressure due to changes in emission norms and rising input costs, but the softening in metal prices has somewhat released pressure on margins. Commercial vehicles and tractor manufacturers are the most affected by the increase in tyre prices: they’ve been able to pass on the cost increase to consumers with some lag.
Two-wheeler companies have raised prices only from June 1 and, hence, margins would be under pressure. Hero Honda has been hit by the cost pressure and is expected to show a 80-100 basis-point decline in operating margins. Bajaj Auto is expected to show a 200 basis-point jump in margins on account of a better product mix. TVS Motors may show a modest 40-point jump. Car companies are mostly yet to raise prices, so their margins could decline. However, Maruti had announced price rises thrice, from January to April.
During the quarter ended June, original equipment manufacturers (OEMs) announced price rises to recover a portion of the increased input cost. Though the amount was not significant, the frequency was high in some cases. A major concern for the auto sector during the quarter has been the rising input cost pressure, mostly on account of higher commodity prices. Also, due to shortage of key components (like tyres), the pricing power has tilted towards the vendors. In addition, companies have incurred additional cost on upgrading vehicles to conform to new emission norms.
Margins to vary
Among auto majors, Tata Motors was expected to post a 60-plus per cent growth in its sales, on account of a 47 per cent rise in volume. Operating margin is expected to decline by around 125 basis points, on account of the product mix tilting towards the public vehicle segment. Ashok Leyland, on other hand, is expected to post 170 per cent growth in volumes, on account of a strong 228 per cent rise in the medium and heavy commercial vehicle segment. The average realisation is expected to be higher due to price rises. Operating margins are expected to increase by around 1,000 basis points due to the extremely weak corresponding quarter of the previous year.
| Q1 PREVIEW: AUTO SECTOR | ||||||
| Rs crore | SALES | OPERATING PROFIT | NET PROFIT | |||
| Q1FY11 E | % CHG | Q1FY11 E | % CHG | Q1FY11 E | % CHG | |
| Ashok Leyland | 2458.66 | 169.43 | 262.25 | 2050.19 | 142.19 | 1732.70 |
| Bajaj Auto | 3834.77 | 63.98 | 812.7 | 78.46 | 582.61 | 98.55 |
| Hero Honda | 4271.75 | 11.76 | 689.99 | 6.14 | 567.64 | 13.5 |
| Mahindra & Mahindra | 5308.21 | 25.12 | 775.33 | 23.51 | 503.09 | 25.52 |
| Maruti Suzuki | 8378.30 | 29.04 | 1027.88 | 29.59 | 672.5 | 15.25 |
| Tata Motors | 10269.51 | 60.35 | 1040.27 | 42.89 | 368.73 | 67.60 |
| TVS Motor | 1353.28 | 38.71 | 97.48 | 46.37 | 39.70 | 119.36 |
| TOTAL AUTO SECTOR | 35874.48 | 42.42 | 4705.91 | 41.18 | 2876.45 | 42.14 |
| Data source; Angel Broking, Edelweiss, Elara Cap, HSBC, IDFC, Kotak Securities, Motilal Oswal and Religare Research report sourced from stocktalks@googlegroups.com | ||||||
Maruti Suzuki is likely to be impacted by the adverse foreign currency movements, with the yen appreciating by eight per cent and the euro depreciating by six per cent during the quarter. The margins are expected to be flat year on year, while growth in net profit is expected to be modest, at around 15 per cent. Mahindra & Mahindra should show 25 per cent growth in sales and net profit, while operating margins are expected to decline marginally on account of steel contracts entered at higher prices.
Bajaj Auto is lined for another good quarter, with a 200-basis point increase in margins. Hero Honda has reported 10.3 per cent growth in volumes due to higher sales of new variants. Operating margins are expected to decline on account of higher raw material cost, mainly steel and rubber.
