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Hurdles out of the way

Parvatha Vardhini C | Updated on January 10, 2018


The first quarter report card for 2017-18 is out. We evaluate the performance of the auto sector to see what lies ahead

A slew of regulatory and macro-economic issues applied the brakes on the performance of auto companies both in fiscal 2016-17 and in the June 2017 quarter. While the ban on big diesel vehicles in Delhi in the first half of 2016 affected companies such as Mahindra and Mahindra, demonetisation and the switch-over from BS III to BS IV emission norms took a toll on two-wheeler and commercial vehicle makers in the second half of last fiscal.

Thus, aggregate sales growth for the 10 auto companies that are part of the Nifty 500 grew only 2.8 per cent in 2016-17 (over 2015-16).

Profits shrank by 3 per cent in this period. Into 2017-18, de-stocking ahead of the GST implementation weakened the first quarter. In this period, topline was lower by 2.1 per cent (over the June 2016 quarter).

Costlier raw materials saw operating margins come down by about 200 basis points. Other income for the companies helped shore up aggregate profits, which grew 6.3 per cent. Overall volume growth for the industry stood at 6-7 per cent in both these periods — neither in the first gear nor in the fourth. But there was a silver lining in select pockets.

Winners and losers

With premium bikes from Royal Enfield selling like hot cakes, Eicher Motors had a dream run. Despite the temporary blip due to demonetisation, tractors sold well, thanks to the low base of 2014-15 and 2015-16.

Good monsoon also helped. Escorts was a big beneficiary here. With cars such as Vitara Brezza , Ciaz and SX4 S-Cross doing well, Maruti Suzuki was also among the better performers.

However, though these companies registered strong numbers and those such as Hero MotoCorp did manage some growth too, the mixed performance of Mahindra and Mahindra and Ashok Leyland dented overall numbers a bit.

What pulled down the overall numbers all the more was the poor performance of Tata Motors, which was affected by losses in its domestic business as well as forex vagaries and higher marketing expenses at Jaguar Land Rover.

Bajaj Auto suffered too, due to problems in its key export markets in Africa.

Much of the trends mentioned above are reflected in the way the stocks have moved over the last one-and-a-half years. Escorts is up four times since April 2016, while Maruti Suzuki has doubled. Eicher Motors and TVS Motors have also been strong performers, with 60-85 per cent gains.

Bajaj Auto and Mahindra and Mahindra have clocked margin gains of 13-15 per cent, while Tata Motors and Ashok Leyland have been losers.

What lies ahead

With the regulatory hurdles behind them, the auto sector will see better times from the September 2017 quarter. Apart from a pick-up in rural sales, benign interest rates are also seeing urban sales gain speed.

A pick-up in the economy and lower turnaround times for trucks due to absence of check posts will favour truck sales as well.

However, investors need to be cautious about mid-cap stocks such as Escorts and TVS whose valuations have catapulted, as their upside may be limited.

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Published on September 02, 2017

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