Auto sales forecast grim, but profits may still grow

Large discounts and festive demand notwithstanding, passenger car sales declined 12.5 per cent in December forcing the industry body, Society of Indian Automobile Manufacturers (Siam), to scale down growth forecast for the financial year to 0-2 per cent from 1-3 per cent that it had projected in October 2012. This is the third time Siam has lowered growth outlook for the auto sector. In July 2012, it had lowered growth outlook for passenger cars from 10-12 per cent to 9-11 per cent.

Yet, brokerages expect auto companies to report a sequential improvement in profit margins for the December quarter on the back of improved volume gr­o­wth, even thou­gh they expect margins to remain under pressure on a year-on-year basis, experts said.

“We expect auto firms to post overall volume growth of 6.3 per cent from the year-ago period and 8.7 per cent from the previous quarter. Two-wheeler firms are likely to grow six per cent year-on-year and eight per cent sequentially,” said Ajay Shethiya, an analyst at Centrum Broking.

Shethiya further said, “Four-wheeler makers are expected to register six per cent year-on-year growth and nine per cent sequentially. On the back of this, we expect auto firms to register overall revenue growth of 12 per cent from a year ago and 14 per cent sequentially in the December quarter, driven by both volume growth and increase in realisations.”

Karvy Stock Broking analyst Mitul Shah said while margins have improved sequentially due to festive demand, but compared with the year-ago period, they have remained under pressure due to heavy discounts offered in December.

“The discounts were higher in 2012 compared with last year, as auto firms relied on these to improve sales. The rise of petrol prices also had an impact on sales of petrol variant cars,” Shah said.

Shethiya of Centrum Broking also expects margins to remain under pressure compared with the year-ago period, but says some improvement is expected on a sequential basis. “We expect earnings before interest, taxes, depreciation and amortisation (Ebitda) margins to contract 126 basis points from a year-ago period, but expand 38 basis points sequentially driven by Hero MotoCorp and Maruti Suzuki. There were no major price hikes by the OEMs (original equipment manufacturers) during the quarter, but for a marginal increase in the CV segment, which too was offset by higher discounts to support demand,” said.

As per Siam data, domestic car sales totalled 1,41,083 units in December, down 12.5 per cent from 1,61,247 units sold in the same month of the previous year. This was the biggest drop since August 2012, when sales had declined by 18.5 per cent.

Car is a discretionary item of purchase, and with the slowdown in the economy, the industry saw subdued sales, forcing the OEMs to dole out more discounts to lure customers.

Yaresh Kothari, an analyst with Angel Broking, said Maruti Suzuki and Mahindra & Mahindra are expected to perform better in the December quarter compared with their peers. Tata Motors’ domestic performance is likely to remain weak, while sales are expected to be better sequentially at Jaguar Land Rover. However, JLR may post lower sales compared with the year-ago period due to the higher base of the previous year.

Centrum Broking expects Tata Motors to post consolidated revenues of Rs 49,800 crore, a growth of 10 per cent from the year-ago period and 15 per cent sequentially. “Consolidated Ebitda margin is expected to be 12.5 per cent, down 261 basis points from a year ago, but up 18 basis points sequentially,” said the analyst.

The analyst forecasts Maruti Suzuki (MSIL) to report strong revenue growth of 39 per cent compared with a year ago and 32 per cent sequentially driven by 24 per cent volume growth and 13 per cent growth in realisations. He expects MSIL to report Ebitda margin at 8.8 per cent, higher by 353 basis points from a year ago and 270 basis points sequentially.

The brokerage expects revenues of Mahindra & Mahindra (standalone, excluding MVML) to grow 15 per cent in October-December 2012, compared with a year ago to Rs 10,800 crore. “We expect Ebitda margin at 11.4 per cent in the December quarter, which would be 108 basis points higher from a year ago but flat sequentially,” said Shethiya.

Siam projects two-wheeler sales to grow between 3-5 per cent, compared with 11-13 per cent projected in April last year.

“Sentiments have not improved. Interest rates are still high. Even fuel prices remain on the higher side and the economy is down. Negative sentiment among lower-end customers by virtue of interest rates not coming down and high fuel charges is hurting sales. Going by current trends, we do not think the industry will be able to recover in the fourth quarter unless the government provides some support,” said S Sandilya, president of Siam.

Brokerages expect Bajaj Auto to register revenue growth of seven per cent from a year ago period to Rs 5,400 crore, driven largely by two per cent growth in realisations and five per cent volume growth. Centrum Broking expects Hero MotoCorp (HMCL) to register revenue growth of 1.5 per cent from a year ago period and 18 per cent sequentially. The brokerage expects Ebitda margin at 15 per cent, down 63 basis points from a year ago, but up 113 basis points sequentially.

To boost the industry sentiment and growth, Siam demanded a reduction in excise duty and continuation of all benefits of the Auto Mission Plan (AMP) for another 10 years, i.e. till 2026. Sandilya said the excise duty on automobiles, which was increased in the last year’s budget, needs to be reduced, particularly for commercial vehicles.

In the nine months ended December 2012, car sales fell by 0.33 per cent to 13.81 lakh units. “There is a need to watch government policy initiatives which may undermine benefits,” Sandilya said, adding “A lot of targeted money may not be reaching the intended beneficiaries.”


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