Auto sector: Q4's stellar show may not last in FY13

Except two-wheelers, profits of most auto firms to come under stress in FY12

Going by March 2012 sales figures, the automobile sector appears to be doing rather well. The fourth quarter of FY12 has seen the return of the demand in the auto sector as suggested by sales figures. From commercial vehicles to passenger cars, sales have picked up across the board. So, is it time to celebrate and does it mean FY13 will be better? Though the sales trajectory looks rather promising, analysts say it’s not time to celebrate just yet, as the “best ever sales figures for March” have come on the back of higher tax expectations. Most consumers have advanced their purchase plans as an increase in excise on diesel vehicles was expected.

Mahindra & Mahindra and Tata Motors have clocked double-digit sales growth in March. In the domestic market, Tata Motors has grown sales of vehicles by 34 per cent year-on-year to 36,984 vehicles in March, while M&M has grown sales by 33 per cent to 23,020 units. Maruti Suzuki has clocked sales of 112,724 units in March, growth of 2.1 per cent. However, the market does not expect this trend to continue as most of the latent demand, too, has been exhausted in March. Given the excise duty has been raised and many states have increased value-added tax (VAT), sales momentum may see some slowdown.

However, companies that have a robust diesel portfolio and high waiting periods may continue to do well. Most analysts expect sales in FY13 to be moderate. Sharekhan’s auto analyst Deepak Jain expects LCVs to outperform other segments in FY13, with volume growth of 18-20 per cent. He says: “Two-wheelers may grow by 10-12 per cent, as there seems to be a very compulsive case for personal mobility in India. Utility and passenger cars may clock volume growth of 12-15 per cent, but the first half of the fiscal may be challenging. Growth in tractors may be between five and eight per cent.”

The forecast for the first half of FY13 may not be promising, but will robust sales in the last few months of FY12 improve profitability of automakers? The Street thinks not. While two-wheeler players won’t throw up any negative surprises, the slowdown in passenger car sales will be negative. Also, the strike at Maruti and the collapse in M&M’s tractor sales will take a toll on both companies’ profits.

For instance, Maruti’s sales volume may have fallen by 10.8 per cent y-o-y in FY12, but analysts believe the net profit could fall nearly 40 per cent. M&M may see its net profit remain flat as tractor sales fell in the last few months. While M&M’s utility vehicles are doing well, this segment may not be able to prop up profitability.