Profits of auto cos seen declining in Q2: report

An expected decline of over 25 in the profits of car market leader Maruti Suzuki India for the second quarter this fiscal is likely to be followed by a muted performance by other auto companies, according to a research report.

Lower volume growth and higher input costs are the main reasons for the expected decline in auto sector earnings, said Angel Broking, a stock-broking and wealth management firm.

"Maruti is expected to report a sharp 25.7% y-o-y decline in profits due to lower volumes primarily because of labour strikes," a report by Angel Broking said.

Tata Motors' profitability is also expected to be affected due to a higher tax rate on the JLR front, it added.

The report said that operating margins of most of the auto firms are expected to decline on a y-o-y basis in Q2 FY12 on account of increase in raw material costs.

Further, higher discounts offered by passenger car companies in an attempt to push up sales will also weigh on margin performance, the report said.

On the net profits, it said the auto sector margins may contract to 7.3, largely due to a decline in profitability at Tata Motors and Maruti.

Although the forecast is not so encouraging for the auto sector, during Q2 FY12 the BSE Auto Index fell by 3.4 against a 12.3 decline in the Sensex, thereby outperforming the benchmark index by 8.9.

Mahindra & Mahindra, Bajaj Auto and Hero MotoCorp contributed to the outperformance, driven by strong monthly volume numbers.

Tata Motors, however, underperformed on account of concerns relating to JLR volume growth because of rising economic uncertainty in the US and the Europe.

Apollo Tyres and Exide also underperformed because of slowdown in the demand for tyres and batteries.

Growing pessimism regarding overall volume growth in the auto sector in this fiscal due to rising interest rates, fuel and product prices weighed heavily on investor sentiments, thus negatively affecting stock prices, the report said.

Maruti Suzuki will announce its financial results for the quarter ended September 30, 2011 (Q2) on October 29 and Bajaj Auto will declare its financial results on October 20.