Rising interest rates, higher input costs could play spoilsport.
Strong sales in August and expectations of a jump in demand during the festive season saw the prices of most auto stocks move up by over two per cent last week. While Bajaj Auto and TVS Motors touched their 52-week highs on the back of a robust performance, Hero Honda has been an exception. It has posted negative returns as it was bogged down by speculation of Honda’s exit from the company.
The auto majors managed strong sales growth in August despite monsoons, capacity issues and price hikes. Going ahead, analysts estimate the sector should grow 12-15 per cent year-on-year (y-o-y) for 2010-11. Given the growing demand and low inventory at distribution points, the key challenges for the companies will be to overcome capacity constraints, absorb or pass on increasing raw material costs and tackle rising interest rates.
Capacity constraints
M&M, Maruti Suzuki, Tata Motors and Hero Honda are facing capacity or supply-related issues. Maruti, which is operating at full capacity, was able to achieve its highest ever monthly sales at 104,791 units by tweaking its production capacity to be able to achieve a four per cent increase in volumes over July, according to Edelweiss Securities. Despite increasing competition, the passenger car leader was able to hold its own in the A2 category with a 27 per cent y-o-y jump.
M&M’s, sales though up 28 per cent y-o-y, were impacted by a shortage of such key components as tyres, castings and diesel fuel injection pumps, believes Macquarie. New products Maximo and Gio helped push its four-wheel pick-up sales by 45 per cent.
Hero Honda’s sales growth was satisfactory, rising two per cent y-o-y to 420,000 units, and which is expected to jump further once it launches up to five new models and variants. Its volumes, which were affected in the June quarter due to supply issues, are likely to be resolved over the next one month.
A sequential decline in Tata Motors’ medium and heavy commercial vehicles sales was disappointing, considering the emission norms’ implementation. Edelweiss believes Nano volumes were down due to production constraints.
| FULL STEAM AHEAD | ||||||
| Sales in units | Aug | % chg y-o-y | % chg m-o-m | YTD | % chg y-o-y | P/E (x) FY12E |
| M&M | 42,338 | 29.60 | -0.70 | 217,222 | 24.40 | 14.37 |
| Maruti Suzuki | 104,791 | 23.60 | 3.90 | 488,972 | 25.50 | 14.67 |
| Tata Motors | 65939 | 32.40 | -2.70 | 315,449 | 42.70 | 7.24 |
| Hero Honda | 424,617 | 2.30 | -0.70 | 2,086,342 | 9.80 | 13.45 |
| TVS Motors | 167,109 | 31.70 | 2.50 | 594,977 | 32.10 | 16.44 |
| Bajaj Auto | 329,364 | 55.00 | 3.60 | 1,576,115 | 65.30 | 15.54 |
| Source: Macquarie, Edelweiss | ||||||
Ashok Leyland, on the other hand, saw its sales jump 56 per cent y-o-y due to a pick-up in sales of both its trucks as well as buses.
Costlier raw materials>
Higher raw material costs have been putting pressure on the operating profit margins of companies over the last two quarters. Most companies have been increasing prices on select models, with an eye on profitability and due to the high demand.
Maruti, for example, hiked prices in August across all models except Alto by Rs 2,000-7,500. With steel companies increasing prices by Rs 1,000-1,500 a tonne from September, expect costs to go up in the subsequent quarters. Given the festival demand, companies are likely to pass on the cost increase, except for key, low-end models.
Rising interest rates
Analysts believe that a rise in interest rates can affect sales in the second half of the fiscal year. With banks increasing their rates in the recent past and over 70 per cent of passenger vehicles and the entire commercial vehicle portfolio funded out of credit, leading players in these two segments will be hit the hardest. Despite the rise in rates, Macquarie believes players like M&M, Tata Motors and Maruti Suzuki will benefit the most from this trend due to their increasing auto finance penetration.
Outlook
Analysts believe that a normal monsoon should spur rural spending and, coupled with rising disposable incomes, low inventory levels and festival period, demand should stay strong over the next three months. Increase in input costs – both on account of raw material and emission-related changes – could hamper profitability. While the long-term growth picture continues to be intact and companies should register robust sales, stock prices are already reflecting the upsides. Analysts are bullish on M&M and Tata Motors.
