Stock Fundamentals

Results Round-up: Auto Manufacturers - Skidding

Parvatha Vardhini C | Updated on June 02, 2019

Poor rural sales and liquidity shortage were reasons behind the fall in profitability

Results of the January–March 2019 quarter of leading auto manufacturers bear testimony to the pressure on volumes that the industry has been facing in the last few months. The double-digit growth (year-on-year) in sales volumes for the industry in the initial months of 2018-19 slowed to single-digit towards the middle of the year and rapidly lapsed into a drop in volumes in each of the last four months, with cars and bikes being the worst hit.

As a result, the overall sales of leading auto manufacturers, which stood at a robust 18.1 per cent in the June 2018 quarter (Y-o-Y growth), tapered to single-digit growth in the September and December quarters and dropped by 1.3 per cent in the quarter ended March 2019. The overall net profit growth has also deteriorated. Excluding Tata Motors, which made losses in some of the quarters, adjusted profits of leading companies grew by 30.5 per cent in the April-June 2018 period. This slowed down to single-digit growth in the June and September quarters. In the three months ended March 2019, profit growth for these companies dropped by 7.5 per cent.

Reasons for the fall

In 2017-18, vehicle sales did well to bounce back from setbacks such as demonetisation and the GST move. However, the industry ran out of luck in 2018-19. Vehicle sales had a good run in the April-June 2018 quarter, thanks to the low base of the previous year due to the GST move.

In the first quarter, industry sales volumes grew by 18 per cent Y-o-Y. Post that, it began to slip. For one, rising fuel costs pinched pockets of consumers. Patchy monsoon and crash in farm prices dented rural sales. Higher insurance outgo due to an increase in premiums on third-party cover was a dampener too. The liquidity shortage among finance companies, following the IL&FS crisis, was the final blow. Vehicles are typically financed purchases, and with credit lines for customers drying up, dealers who usually load up on inventory to meet the festival season demand, were left with piles of unsold stock, forcing companies to slash production in the fourth quarter.

Lacklustre performance

Thanks to the above factors, the topline performance of all companies in the quarter ended March 2019 was nothing to write home about. Among two-wheeler players, Hero MotoCorp was the worst affected, with sales dropping by almost 8 per cent in the quarter. Higher rural exposure in comparison with other two-wheeler players as well as stiff competition from Bajaj Auto in its bread-and-butter entry segment bikes (that is, 75-110 cc bikes) dented volumes by 11 per cent for the company during the quarter.

Maruti Suzuki saw flat growth in volumes and clocked just 0.7 per cent growth in sales. A 15 per cent drop in tractor volumes took a toll on Mahindra and Mahindra. Higher raw material costs was a double whammy for auto manufacturers in this period. Companies such as Ashok Leyland, Bajaj Auto, Hero MotoCorp, Mahindra and Mahindra, Maruti Suzuki and TVS Motors saw their operating margins shrink 1-4 percentage points compared with the March 2018 quarter.

Higher discounting to clear inventory also impacted margins in many cases. Although ‘other income’ rose by 8.4 per cent on an overall basis, and depreciation and tax expenses dropped Y-o-Y, weak operating performance led to the drop in profits in most cases. Tata Motors continued to face headwinds at Jaguar Land Rover due to factors such as a slowdown in China. It saw a 45 per cent drop in profits during the quarter.

What’s ahead?

Considering the several headwinds, auto stocks have taken a hit in the last one year. Barring Bajaj Auto, which gained about 6 per cent in this period, most stocks have lost 17-39 per cent. While valuations have moved lower, near-term prospects are not rosy. Though borrowing costs are going down, uncertainties due to elections and a drying up of private investments and government spending resulted in this fiscal too beginning on a sober note.

Vehicle sales in April dropped by 16 per cent Y-o-Y. Going ahead, while there are no immediate triggers for a pick-up in the first half of this fiscal, the monsoon will play a key role in determining rural demand.

The second half may see sales improve due to pre-buying of cheaper BS IV vehicles before the compulsory sale of BS VI vehicles begin on April 1, 2020.

Overall, the Society of Indian Automobile Manufacturers forecasts passenger vehicle sales volumes to grow by 3-5 per cent in 2019-20, while two-wheeler sales are expected to grow by 5-7 per cent. Commercial vehicle and three-wheeler sales are expected to grow by 7-12 per cent.

Hence, it may be a while before the sector gets back on track.




Published on June 02, 2019

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