May offset margin squeeze in Dec quarter, even as input costs continue rising trend.
While spiralling inflation and peaking raw material prices are expected to put pressure on the margins of two-wheeler and three-wheeler manufacturers, better retail demand during the festive period from the domestic market is expected to marginally offset that in the quarter ended December 31, 2010.
According to estimates prepared by financial analysts tracking the companies, the operating profit margins of Hero Honda, Bajaj Auto and TVS Motors are expected to be better than the second quarter. However, they may falter when compared to the same quarter a year earlier.
The three companies, which command a share of nearly 80 per cent in the two-wheeler market, suffered from high costs of rubber, steel and other essential products during the quarter. But due to fear of a rise in retail prices this month and tighter finance norms of banks, consumers made a beeline for purchases.
Sales of Hero Honda, India’s largest bike maker, during the third quarter grew by 28.5 per cent to 1.42 million compared to the same quarter last year. Bajaj Auto, the country’s second biggest motorcycle manufacturer, posted a growth of 17 per cent at 946,000. TVS Motors, the third biggest, sold 523,000, growing 39.8 per cent.
Vineet Hetamasaria, vice-president (research), Pinc Research, said, “Prices of raw materials have been increasing since April and they have been in that range in the past three quarters. We do not expect them to soften. However, the huge retail demand has proved favourable.”
Hero Honda’s revenue from sales is expected to be in the region of Rs 4,865-5,090 crore, according to analysts’ estimates. The company had recorded sales of Rs 3,827 crore in the same quarter last year. Its net profit, however, is expected to remain flat, in the region of Rs 537-579 crore in the reporting quarter.
Royalty payments of the company to its part promoters, Honda Motor Company of Japan, which has posed a big challenge to its margins in recent quarters, is expected to remain at the same level as the previous quarter. Its Indian promoters have stated that the royalty payment would come down from this month onwards.
Bajaj Auto, which will announce its quarterly results on Wednesday, is expected to post robust growth in operating profit margin, thereby pushing its net profit in the region of Rs 610-652 crore for the quarter.
The company's higher realisation from cost-efficient models such as Discover and Pulsar, which contribute about 70 per cent of total sales, are expected to push its turnover in the range o Rs 4,050-4,243 crore. Bajaj had recorded sales of Rs 3,295 crore in the corresponding quarter last year.
Chennai-based TVS Motors, which sells the Scooty and Apache brand of scooters and motorcycles, is expected to post sales revenue of Rs 1,602-1,630 crore in the December quarter. The company had recorded sales of Rs 1,089 crore in the same quarter last year.
Its net profit is expected to grow to Rs 52-60 crore from Rs 23 crore posted last year in the same quarter.
Rising fuel prices and general inflation are expected to push demand for fuel-efficient bikes, as consumers generally tend to shift to cost-effective modes of transport. Analysts, though, are not expecting any major impact on demand due to rising interest rates.
“Interest rates on two-wheelers are already at 20-22 per cent. So, if there is a 200-300 basis points (2-3 per cent) rise, it won’t impact the financials of the buyer, as the loan size is certainly not as large as cars,” said an analyst.
Besides, under 30 per 100 buyers are seeking a two-wheeler loan as compared to over 65 buyers reported in 2006.
Two-wheeler companies have raised the prices of almost all products to offset the rise in input costs from the beginning of this year. This will not improve margins but will largely aid in maintaining margins, at least in the final quarter, according to analysts.
