Riding on cuts in excise duty and interest rates, plus savings in raw material (RM) costs, 14 auto makers reported healthy growth in operating margins and profit in the first quarter ended June 30. Overall, net profit rose by 66 per cent on a modest 7 per cent growth in net sales — the comparison is with the same period a year earlier — but operating margins increased by 303 basis points (bps) to 9.64 per cent, due to decline in cost of production and higher realisation.
The RM cost to net sales ratio declined to 67.8 per cent as against 73.1 per cent, while the excise duty to sales ratio fell to 8.6 per cent from 12.8 per cent at the same time a year before. The RM cost saving is estimated to be around 47 per cent of aggregate net profit or Rs 1,100 crore, assuming the RM/sales ratio is the same. Auto analysts expect raw material prices to go up in the second half of 2009-10 and hence this cushion may not available for a longer period.
Two-wheelers firms did extremely well, recording a significant jump in sales, profits and operating margins (see table). Cars and utility vehicle makers performed well, too, on the back of higher export realisation and decline in cost of production. The commercial vehicle segment suffered, with Ashok Leyland and Tata Motors reporting a decline in sales.
Hero Honda beat the street, with a 88.6 per cent rise in net profit, thanks to a 488 bps decline in the RM costs to sales ratio and a Rs 24 crore saving from a lower tax rate. The company has maintained its volume expectation of 4.1 million units, but auto analysts at CLSA expect the company to sell close to 4.25 million units for the year.
Hero Honda expects higher commodity prices to start impacting raw material costs in the second half. The rise in operating margins for the first quarter was driven by soft commodity prices, but the benefit was partially offset by high advertisement expenses, due to the IPL tournament sponsorships and a wage hike. These expenses could return to normal, leading to a further margin expansion.
Bajaj Auto also had a 88.6 per cent rise in net profit, as the operating margins were up by almost 1,000 basis points, to 13.15 per cent. The better export realisations, higher volumes and a better product mix did the trick. Competition in the motorcycle segment is heating up, with Bajaj entering the executive segment with a 100cc bike, followed by Hero Honda later in the year.
Mahindra & Mahindra (M&M) reported a 28.7 per cent growth in sales, mainly on account of a 44.1 per cent rise in tractor volumes due to inclusion of units of Punjab Tractor, which it acquired. The net realisation per vehicle, according to the analyst at Prabhudas Lilladher, was higher by 4.9 per cent. The company reported net profit growth of 151.6 per cent.
Maruti Suzuki exports zoomed 134.7 per cent, which resulted in a 33.9 per cent rise in net sales. The analyst at HDFC Securities says realisations have been higher due to higher sales of the new A2 model cars in the export and domestic markets. Realisations in exports improved due to a strong Euro and the incentives to scrap older cars offered by governments in Europe.
Tata Motors’ adjusted net profit of Rs 196 crore has been well ahead of market expectations. The reported net profit of Rs 513 crore is adjusted for other income of Rs 318 crore from sales of investment. The company benefited from a lower effective excise duty, as production from Uttarakhand increased. Its operating margins in the quarter increased due to higher-than expected reduction in commodity costs, cost reduction measures and an improved product mix.
Ashok Leyland posted poor results among auto companies, as sales slipped 51.7 per cent and net profit dipped 84.6 per cent. The margins of Ashok Leyland declined during the quarter, as its costs increased by 5 per cent, quarter on quarter, due to liquidation of high-cost inventory. The company continues to be adversely affected owing to its concentration of sales in southern India.
If one goes by sales numbers for the month of July, the sector is expected to do well. The two-wheeler segment performed strongly in July, with the top three companies registering a growth of 17 per cent. Hero Honda outperformed with a 30 per cent growth, while TVS Motors and Bajaj Auto reported discouraging numbers.
Among car makers, Maruti Suzuki did well with a 27.6 per cent rise in domestic sales, while Tata Motors’ commercial vehicle division posted growth after nearly a year.
