Auto companies navigate high costs, price hikes

With volumes continuing to grow at a robust pace and companies effecting price hikes on the back of a sustained demand, auto majors are likely to register 30-35 per cent growth in revenues and profits for the June quarter. The economic recovery and consequent robust demand has helped bring back pricing power to a sector that was struggling a year ago with dropping sales, rising inventory levels and low capacity utilisation.

Almost all companies have been able to increase prices by three-five per cent in the June quarter. What has enabled this is the strong growth in volumes that companies registered over the last three months. While there are some concerns regarding higher raw material and fuel costs, some of the auto majors - like Maruti, Hero Honda and M&M - are expected to churn better numbers.

Robust June numbers
Listed auto majors carried their performance of 30 per cent volume growth recorded in the first two months of the quarter into June. This came despite the period being seasonally weak and auto companies facing production constraints. While part of the reason for the good performance was due to the low-base effect, the continuing strong economic recovery, growing rural demand and availability of credit seems to have played its part in ensuring higher numbers.
 

Healthy exports, new product launches and rural demand saw the two-wheeler sector grow 33.5 per cent over the June 2009 quarter with listed two-wheeler makers recording their highest ever sales. What stands out, according to Pinc Research, is that scooter sales are growing at 45 per cent from the year-ago period and now contribute a significant 17 per cent of overall two-wheeler volumes. While passenger and utility vehicle makers also saw good growth rates, despite maintenance shutdowns, commercial vehicle manufacturers continue to benefit from the uptick in industrial activity.

Two-wheeler firms, Tata Motors shine
While most auto majors saw volumes go up 25-30 per cent over the year-ago quarter on a sequential basis, Maruti Suzuki and M&M experienced the sharpest drop of 14 per cent and four per cent, respectively, due to their annual plant maintenance shutdowns and component shortages. The stars of the June show were Tata Motors and two-wheeler makers.

While Tata Motors saw medium and heavy commercial vehicle (M&HCV) grow by half to 15,000 units, its passenger vehicle sales were up 63 per cent on higher despatches of Nano from the Sanand plant, which has come onstream. Two-wheeler maker Bajaj Auto’s strong sales were helped by a 68 per cent growth rate in its motorcycle segment and rising exports. Its two key brands Pulsar and Discover, which account for 70 per cent of sales, continue to be the star performers.

Despite a high base, Hero Honda had its fourth straight month of 400,000-plus sales due to strong motorcycle as well scooter (Pleasure) sales. TVS Motors saw a 37 per cent growth in despatches on the back of higher numbers for its recently launched Jive motorcycle and Wego scooter.
 

M&M’s tractor sales, which are normally robust in June due to rural demand, fell 13.5 per cent due to capacity constraints. The management believes that demand continues to be robust for the farm equipment segment.

Future concerns
Analysts say the increase in interest rates, and subsequent rise equated monthly instalments, higher fuel costs, higher raw material cost and price increases may impact demand, though there are no signs of this happening as of now. While volumes are likely to be robust if monsoon is normal and industrial production continues to be strong, volume growth is likely to drop due to the high base-effect in the second half of the current financial year.

The hike in raw material costs will, according to Sharekhan, lead to a marginal drop of 23 basis points in operating profit margins for companies in the June quarter vis-à-vis the year-ago period. The research firm believes a higher scale of operations, coupled with price hikes undertaken by the companies, will help cushion the impact. The sequential impact, however, will be over a percentage point, according to the firm.

Given a 40 per cent growth in volumes, sales should grow upwards of 35 per cent for the auto companies in the quarter. Higher volumes will also reflect in the bottom line growth for most companies - in the region of 30 per cent. Among auto companies, most analysts are betting on Maruti Suzuki to do well on the back of high volumes, expected price increases in this quarter and launch of new variants. The stock is expected to return about 20 per cent from these levels.

This article had misspelt Wego as Wega. It has been corrected.