Auto firms likely to report muted Q2 earnings

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Mumbai: Automobile firms are expected to post muted earnings for the September-end quarter compared to a year ago, according to the average earnings estimates of five brokerages polled by Mint. Higher input cost coupled with steep discounting are likely to weigh on the earnings and offset the gains the firms could have accrued because of strong volumes.

Prices of major commodities such as steel and aluminium rose by about 20% over the year ago in rupee terms during the quarter. High discounts were offered on segments such as medium and heavy commercial vehicles, and entry-level motorcycles and passenger vehicles, thus squeezing margins further.

Average estimates of five brokerage firms—QuantCapital Pvt. Ltd, Emkay Global Financial Services Ltd, Kotak Institutional Equities, HDFC Securities Institutional Research and IIFL Institutional Equities—indicated that companies such as Maruti Suzuki India Ltd, Mahindra & Mahindra Ltd and Bajaj Auto may see strong volume and revenue growth but a profit decline. Conversely, Tata Motors Ltd, Hero MotoCorp Ltd, Ashok Leyland Ltd, Eicher Motors Ltd and TVS Motor Ltd may see an increase in both revenue and profits.

This quarter saw high demand on the back of an early festive season and strong rural demand due to higher government spending, near-normal monsoons and the receding impact of demonetisation. The impact of goods and services tax (GST) was significantly felt in July and August as consumers advanced their purchases in anticipation of the cess in September. Sales of passenger vehicles rose 10.16% to 391,584 units, in the three months to September over a year ago, according to industry lobby Society of Indian Automobile Manufacturers (Siam).

Fuelled by best-selling models such as the Baleno compact car and Brezza compact SUV, passenger revenue at car market leader Maruti Suzuki is likely to advance to Rs22,046.2 crore but net profit at the firm is expected to decline by 7% to Rs2,229 crore due to the ramp-up of the Hansalpur plant in Gujarat, according to Emkay analysts.

Ashok Leyland, India’s second largest truck and bus maker, is expected to witness the highest growth in revenue, 33%, to Rs6,157.5 crore, among auto companies. Profit is also expected to rise 32.7% to Rs384.8 crore due to a better product mix (higher share of in-demand heavy duty trucks) and higher scale, thus offsetting cost pressures, wrote Raghunandhan N.L. and Bibhishan Jagtap of Emkay in a 6 October note.

A robust tractor sales is estimated to boost revenue at Mahindra and Mahindra Ltd by 20% to Rs12,180.1 crore for the quarter over a year ago, but weak SUV sales is likely to drag down the company’s net profit by 9.4% to Rs1,252.9 crore from a year ago. Mahindra expects to see better growth for its UVs in the second half of the fiscal with the launch of a multi-purpose vehicle, the U321, and fresh models of the KUV, Scorpio and XUV, wrote Saurabh Kumar and Deepika Mundra of JP Morgan Securities in a 29 September note.

Driven by an improving performance of the domestic business and reduction in foreign exchange and hedging losses at the UK subsidiary, Jaguar Land Rover Automotive Plc., consolidated net profit at Tata Motors may zoom 37% to Rs1,119 crore while revenue is expected to be up 5% to Rs69,200 crore.

Among two-wheeler firms, market leader Hero MotoCorp is set to retain the pole position with a 12.3% year-on-year rise to Rs8,760.4 crore in revenues and 1.5% rise in profits to Rs1,019 crore on the back of higher scale and rural demand. An extensive distribution network and strong rural presence will majorly benefit the company in the next two years, according to Abhishek Jain and Sneha Prashant of HDFC Securities in an 11 October note.

Bajaj Auto Ltd, which will report its earnings on Tuesday, is expected to see a 5.2% decline in profitability for the fourth straight quarter but an overall rise of 6.6% in revenues. There was a contraction in sales volumes and profits in the domestic motorcycle segment but a rise in three-wheeler business and two-wheeler exports, said Hitesh Goel and Nishit Jalan of Kotak Securities in a 4 October note.

Analysts expect margin to remain under pressure in the quarters ahead, owing to commodity prices. They expect strong demand in the second half of the fiscal on the back of increased capital spending by the government in the rural economy, increasing per capita income, growing urbanisation and falling interest costs, to boost earnings in the months ahead.