Two-wheelers, LCVs to drive Q3 auto sales growth up 20-22%

ALSO READ News and Notices about Maruti Suzuki See interviews with Maruti Suzuki Management See what other Experts & Brokerages are saying about Maruti Suzuki See previous Results of Maruti Suzuki Maruti Suzuki BSE | NSE 29/05/12 Are Mutual Funds betting on Maruti Suzuki? Other Stocks in this news Hero Motocorp | Bajaj Auto | TVS Motor Company | Ashok Leyland | Mahindra and Mahindra |

Moneycontrol Bureau

The road so far this fiscal has been full of speed bumps for passenger car makers. But good growth among two-wheelers and light commercial vehicles is expected to drive automobile sector's revenue up 20-22% from a year ago in the third quarter.

The October-December quarter is usually a peak season for auto makers, sales are the best in the year. This time, however, sales, especially of passenger cars, were anything but satisfactory as a sharp rise in interest rates and high fuel prices led to slowing demand. The labour problems at India's top passenger car maker Maruti Suzuki 's plant in Manesar only further added to the cup of woes.

"The bells and whistles associated with the festive season were missing this year leading to below expectation volumes for the Indian automobile industry during the quarter" said Vineet Hetamasaria and Nikhil Deshpande of Pinc Research.

Maruti Suzuki's volumes for instance declined over 27% year-on-year in the third quarter as a workers strike in its Manesar plant, hurt production schedule of one of its largest selling cars Swift.

Sales of passenger cars have slipped about 1% from a year ago in the third quarter.

"The PV industry continues to face the brunt of fuel price hikes and increased interest rates as most buyers are waiting on the sidelines and are postponing their purchases," Angel Broking said in a report.

Sales of light commercial vehicles and three-wheelers, however, have continued to surge ahead so far this fiscal, although here too there is some sequential slowdown. LCV sales are up over 26% year-on-year in the third quarter, while three-wheeler sales rose over 10%.

Two-wheeler volumes were also up around 12% year-on-year in October-December, largely led by Hero MotoCorp , which reported highest ever volumes for the quarter in October-December. Bajaj Auto and TVS Motor , however, saw a sequential decline in sales.

Margin Pressures

For most part of the last one year, raw material prices were on an uptick, hurting automakers. Companies have raised prices over time to offset these input cost pressures, but haven't been able to pass on the entire cost increases to customers.

The discounts and freebies offered during the Oct-Dec quarter, to spur demand only added to the margin pressures. Recent depreciation of the rupee also made importing many components expensive, further dragging down margins.

Emkay Global Financial Services expects adjusted EBITDA margins of auto companies will decline 100 basis points year-on-year.

Jinesh Gandhi and Mansi Varma of Motilal Oswal expect, auto makers' EBITDA margins will decline 20bps quarter-on-quarter and 190bps from a year ago.

Maruti Suzuki's profits are expected to fall a sharp 50-70% year-on-year due to decline sales, coupled with input cost increases and rupee depreciation.

Outlook

Demand outlook for the next fiscal year and commentary on raw material, foreign exchange contracts will be key things that will be watched by analysts and investors alike.

While LCV sales continue their uptick, two-wheeler sales have seen some slowdown post the festive season. Bajaj Auto's total sales rose just 10% in December, with motorcycles up only 8% from a year ago. TVS Motor's sales declined 0.8% during the month.

However, there could be a smooth road ahead. Lending rates, for instance, are expected to ease in fiscal 2013, which will augur well for passenger vehicle and medium & heavy commercial vehicle sales.

Raw material costs have also started to ease. Rubber prices are down 33% year-on-year and aluminium is down 21% say the Motilal Oswal analysts. This will have a positive impact on margins going ahead.

New product launches like Maruti Suzuki's Ertiga, compact D'ire, Bajaj's KTM Duke, Hero's Impulse motorcycle among many others is also expected to give sales a boost over the next one year.

Stock View

The CNX Auto index is down 4.3% since September 30, a tad higher than the wider Nifty, which is down 4% during the period.

"Concerns regarding volume growth in the sector due to increasing macro-economic issues weighed on investor sentiments and, therefore, affected the stock price performance," Angel Broking said.

Analysts say despite the near-term growth concerns, long-term outlook remains bullish, given the low penetration and burgeoning middle class.

Angel has a "positive outlook" on Mahindra & Mahindra and Ashok Leyland. Motilal Oswal prefers Tata Motors and Maruti Suzuki among four-wheelers and Hero MotoCorp among two-wheelers, although it also has a "buy" on M&M and Bajaj Auto.

Pinc has a "buy" on Ashok Leyland , Bajaj Auto, M&M and TVS Motor, and an "accumulate" on Hero MotoCorp and Maruti Suzuki.

Nachiket Kelkar
nachiket.kelkar@network18online.com