Low sales, high discounts to crimp auto makers’ Q4 earnings

 

 

Mumbai: A combination of sluggish sales, high discounts and increased ad spending is expected to have crimped the earnings of auto firms in the traditionally buoyant March quarter, said analysts, while predicting a slow turnaround for the sector.

Domestic car sales fell 22.51% in March, according to the Society of Indian Automobile Manufacturers (Siam), declining faster than the 0.3% drop in sales in the first nine months of 2012-13, making the final quarter the worst in the year for the auto sector.

With the exception of car market leader Maruti Suzuki India Ltd, most auto firms are likely to see their profits contract from a year earlier, according to a Mint poll of five brokerages—Bank of America Merrill Lynch, Prabhudas Lilladher Pvt. Ltd, Edelweiss Securities Ltd, IDFC Research, ICICI Securities.

“We expect results to be weak, dragged down by lower sales in an otherwise seasonally strong quarter,” S. Arun, analyst at Bank of America Merrill Lynch, wrote in a 5 April research report.

Maruti could be an exception, he said, helped by the merger of the engines business with the parent.

The car maker’s quarterly profit is estimated to increase 8% to Rs.670.35 crore, according to the average estimate of the five brokerages. The local arm of the Japanese car maker Suzuki Motor Corp. will report its earnings on 26 April, kick-starting the earnings season for auto firms in India.

As India’s economic growth slowed—it is estimated at 5% for 2012-13—auto sales during the year fell by 6.7%, according to Siam, registering the first drop in 12 years as buyers put off discretionary purchases.

Analysts don’t see a turnaround soon even if lending rates are lowered. “We don’t expect any fireworks in terms of sales in the near to medium term,” said Deep N. Mukherjee, director, India Ratings and Research Pvt. Ltd, part of the Fitch Group.

The rupee’s depreciation negated any gains auto companies could have accrued during the March quarter from softening of commodities, he said. Global aluminium prices declined 8.12% from the three months ended December, and prices of steel and rubber fell 5.4% and 9.7%, respectively, according to Bloomberg.

“Given that even sales of medium and heavy commercial vehicles, which are considered to be barometer of GDP (gross domestic product) growth, are not showing any signs of recovery, we are not expecting any quick turnaround, especially not like the one witnessed in fiscal 2009-10, when excise, petrol price, and interest rate cuts reduced the cost of ownership by around 15% in six months,” analysts Sanket Maheshwari and Vijit Jain of ICICI Securities wrote in a 5 April report.

Tata Motors Ltd, India’s largest auto maker by sales, is expected to report a 45% fall in net profit to Rs.3,395 crore for the March quarter, according to the Mint analysts’ poll, because of weak domestic business and negative free cash flow at its UK subsidiary Jaguar Land Rover Plc (JLR).

“While Tata Motors’ domestic operations continue to struggle with a cyclical slowdown in commercial vehicles and market share loss in cars, we expect this to be partially offset by the strong volumes from JLR. We remain cautious, however, with concerns over the negative free cash flows expected in FY14E/FY15E,” Barclays Equity Research analysts Sahil Kedia and Rohit Goel wrote in their 18 April report.

Ashok Leyland Ltd, India’s second largest commercial vehicle maker, is also likely to see its quarterly profit contract as a turnaround in freight availability still alludes transporters. Profit at the Chennai-based firm is expected to fall by 22.11% to Rs.207 crore on account of poor volumes, high unsold stocks and receivables.

Mahindra and Mahindra Ltd, India’s largest utility vehicle and tractor maker, one of the few auto firms to have reported brisk sales, too, is expected to see its profit contract because of poor sales of tractors, which account for 30% of its total revenue.

As per the average estimates, the Mumbai-based firm’s profit is likely to drop 10% to Rs.786 crore.

Jinesh Gandhi, an analyst at Motilal Oswal Securities Ltd, said he expects Mahindra’s tractor sales to fall 5.2% from a year ago and its margin on earnings before interest, taxes, depreciation and amortization (Ebitda) to decline because of high discounts and spending on advertisements.

High fuel prices and the slowdown in the economy also hurt two-wheeler companies, dragging overall sales by 4% in the March quarter.

Hero MotoCorp Ltd and Bajaj Auto Ltd reported a 2.6% and 6.6% drop in sales, respectively. As a result, analysts expect Hero’s profit to fall 14% to Rs.519 crore and Bajaj’s to shrink 8.41% toRs.707 crore.

“Overall consumer sentiment continues to be negative and the recovery looks unlikely in the near term. Add to that, the competitive intensity from Honda Motorcycle and Scooter India Pvt. Ltd (likely to launch three new products in the next 6-8 months) would continue to impact the sales of the incumbents,” Surjit Singh Arora, analyst at Prabhudas Lilladher, wrote in a recent report.

The BSE Auto Index dropped 12.53% to 9,994.23 points between January and 31 March, while the Sensex lost 3.04% in the same period. Hero lost the most (falling 18.78% in the three months) among the six mentioned stocks while Mahindra was the least affected, losing 7.4%.

“Even as some of the concerns would recede in 2013-14 we expect a delayed recovery in volumes in FY15 vs our earlier expectation of a recovery in FY14,” wrote Kedia and Goel of Barclays. “For the next 12 months, we expect volume growth to remain muted along with pricing pressure as OEMs (original equipment makers, or automakers) try to incentivize customers.”

 

Lalit Sharma

PGDM 2nd sem