Two-wheelers, utility segment to prop sales in Q1

Automobile manufacturers are expected to post sequential growth in sales, operating margins and profit in the first quarter of 2009-10, driven by Hero Honda, Maruti Suzuki and Mahindra & Mahindra. But Ashok Leyland and Tata Motors are expected to show poor results in the commercial vehicle segment due to lack of demand. TVS Motors should also be showing a decline in sales on lower motorcycles’ volumes.

The sector is likely to post an 8-10 per cent rise in year-on-year net sales, driven by Hero Honda with a sales growth of 66 per cent. Maruti Suzuki expects to post a 28 per cent rise in sales on the back of a 134 per cent rise in exports from new launches. Mahindra & Mahindra should post a 20 per cent growth in sales on strong volume growth in utility vehicles and tractors.

Ashok Leyland is likely to show a 50 per cent decline in sales on poor volume from the passenger and goods vehicle segment. Tata Motors should post a double-digit decline in net sales due to a poor show from commercial and utility vehicles. Bajaj Auto, which has just declared its results, has maintained its turnover compared to the quarter a year earlier, on improved product mix, while TVS Suzuki expects to post a double-digit decline in sales on depleted motorcycle volumes.

Hero Honda and Mahindra are likely to outperform the sector with net profit growth of over 50 per cent each. The net profit of Maruti Suzuki is expected to be flat, due to pressure on operating margins. Tata Motors should show a decline in net profit by over 60 per cent, while Ashok Leyland should post a net loss due to higher interest cost.

The auto analyst at Sharekhan Research indicates that the growth is augmented by new launches in the passenger car segment, with Maruti Suzuki leading from the front. These launches, such as Maruti Ritz, Honda Jazz and Fiat Grande Punto in the segment boosted the demand. The growth in the two-wheeler segment was also backed by new launches and upgradations like Pulsar 220 and Apache-RTR.

The aggregate net profit of automobile companies is expected to be flat due to Tata Motors and Ashok Leyland, but there will be a 100-150 basis points increase in operating margins due to the softening of raw material prices. Auto analysts expect strong margin expansion on a sequential basis across the space, as benefits of low input costs are expected to flow through for most players.

The auto analyst at Edelweiss Research expects Ashok Leyland’s average realisations to go up due to increase in share of revenues from non-vehicle segments. For the company, most of the gains of softening of commodity prices will be offset by the negative operating leverage. Tata Motors is expected to post a modest rise in operating margins, while the rise in interest burden due to funding for overseas acquisitions is likely to hurt its net profit.

Bajaj Auto had better operating margins due to soft aluminium prices and sttricted cost control. Hero Honda is expected to post a 50-100 basis points improvement in margins, as most of the benefits of soft input prices have already been noticed in the fourth quarter.