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Auto cos' Q2 margins may slip on high costs, discounts

After a scorching 30% growth in 2010-11, auto sales have been battling headwinds in the form of costly loans, costly fuel and costly raw materials, this financial year. Two-wheelers, utility vehicles and commercial vehicles are selling well, but passenger car sales have hit a speedbreaker.

October 11, 2011 / 08:42 AM IST
 
 
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Nachiket Kelkar
Moneycontrol.com


After a scorching 30% growth in 2010-11, auto sales have been battling headwinds in the form of costly loans, costly fuel and costly raw materials, this financial year. Two-wheelers, utility vehicles and commercial vehicles are selling well, but passenger car sales have hit a speedbreaker.


In September, commercial vehicle sales rose 18% and bike sales zoomed near 20% according to Society of Indian Auto Manufacturers data. Passenger car sales fell 1.8% despite many companies dishing out incentives like cash discounts, extended warranties, free accessories, insurance etc. Margins of most auto companies, barring two-wheeler and utility vehicle makers, have hit a road block due to the promotions coupled with high input costs.


Goldman Sachs is expecting a 140 basis points EBIT margin decline for auto companies, and Angel Broking says EBITDA margins will contract 130 bps in the second quarter.

"We expect operating margins of most companies to trend downwards on a year-on-year basis in second quarter on account of y-o-y increase in raw material costs and week operating leverage [expect for two-wheeler companies and Mahindra & Mahindra]

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