After a mixed Q2, bumpy road ahead for auto cos

Moneycontrol Bureau

It was a mixed quarter for automobile companies in July-September. Most companies saw strong revenue growth. However, depreciation in rupee and high input costs year-on-year hurt profits, especially for Mahindra & Mahindra and Tata Motors.

Maruti Suzuki , India's top passenger car maker saw profits more than halve due to appreciating yen, strike at its Manesar plant and higher discounts given to boost sales. Among two-wheeler makers Bajaj Auto 's profits were also below analysts expectations due to one time mark-to-market losses.

After setting a scorching pace of 30% growth in 2010-11, passenger car sales have slumped this year amid expensive loans and a sharp rise in fuel prices. With no signs of sales picking up, the road ahead, at least over the next couple of quarters, looks bumpy.

For instance, October, despite being a festive month, saw passenger car sales decline a sharp 24%. This was largely on account of sharp drop in output at Maruti Suzuki, India's largest passenger car maker. Maruti's sales in October fell sharply as the company lost production of over 40.000 units due to the workers unrest at Manesar.

Tata Motors, which is seeing strong demand for its luxury Jaguar and Land Rover vehicles overseas, also saw sluggish growth in the domestic market, with passenger vehicle sales rising just 2.6%. Bajaj Auto's sales rose 7% in October, slower than the 15% growth recorded over April-October.

"Volume growth, especially, for passenger car makers remains a concern...Maruti Suzuki might see some pickup as production gets back on track, but overall the decline is expected to continue at least till Jan-Feb," Yaresh Kothari of Angel Broking told moneycontrol.com.

He feels, a cut in interest rates by banks and a fall in inflation could be positive triggers for sales revival, but that's only likely next year.

Two-wheelers, which have seen strong growth in the first half of the fiscal, are also expected to hit the brakes, due to slow sales post the festive season, and high base of last year.

Kothari still has an "accumulate" rating on Maruti Suzuki and TVS Motor . He also advises "accumulate" on Mahindra & Mahindra , saying valuations are now attractive post the recent sell-off. He is "neutral" on most other auto stocks.

The auto pack has outperformed the broader market this year. Since April the CNX auto index is down 8%, compared with the broader market, which has shed 16%.

Many analysts advise selective buying in the auto pack. There may be potholes in the near-term, but the road is smooth over the long haul, they say. For instance, many analysts are bullish on Tata Motors, betting on continued robust growth at Jaguar and Land Rover. S Arun of Bank of America Merrill Lynch, for instance, agrees that standalone operations are under stress, but increased sales in emerging markets, especially China, is fuelling demand for JLR.

"We are witnessing a strong JLR overcoming the shortfalls in the standalone operations in terms of profitability," say Karan Mittal and Nishant Vass of ICICIDirect.com.

Merrill Lynch's Arun as well as the ICICI Direct.com analysts have a "buy" on Tata Motors.

Even as passenger car makers have struggled, Mahindra & Mahindra has maintained a steady pace helped by strong demand in rural areas for tractors, while its utility vehicles like Bolero and Scorpio continue to see good demand. It is expected to maintain sales momentum going ahead, analysts say.

M&M has got a good response for its recently launched XUV 500 sports utility vehicle. Also it will launch new vehicles from Ssangyong stable, the Korean company it acquired last year, along with new versions of Verito sedan and new Reva electric car, next year. This will further boost the company's volumes says Vaishali Parkar of SBICAP Securities.

Chirag Shah and Siddhartha Bera of Emkay Global Financial Services echo similar views on M&M, saying demand outlook remains strong. However, raw material cost pressures yet to play out fully, they add.

Raw material costs are showing some decline sequentially for auto makers, but remain high compared to a year ago. This will keep their operating margins under pressure in the near-term, say analysts.

Emkay has a "buy," while SBICAP Securities put a "add" rating on M&M.

The Emkay analysts downgraded Maruti Suzuki to "reduce" from "hold" on Friday, saying fiscal 2013 earnings have become hazy due to unhedged currency exposure from the fourth quarter. They also expect strong demand for diesel vehicles could lead to under utilization of existing capacity of petrol vehicles.