Auto sector's margins to take a hit in Q4 on excise cut

Profit growth to fall for most players on weak volumes and higher costs

Automobile companies are expected to report lower margins in the fourth quarter, primarily due to the one-time compensation paid to dealers on account of excise duty cut. Since the excise duty is paid at factory gate and most dealers were sitting on huge inventory (at least six weeks), manufacturers have absorbed a part of the hit so that dealers can pass on the benefits immediately to the customers. While the impact of the excise duty cuts would be limited for Maruti Suzuki, thanks to the yen's depreciation, two-wheeler companies would see the maximum impact.

Finance Minister P Chidambaram reduced excise duty for automobiles in the interim Budget in February, which would have resulted in a loss for dealers if automakers had not compensated them of the loss they suffered on account of the sale of the inventory on which they had paid higher excise. Religare Institutional Equities expects the sector to report a 27 per cent decline in net profit, compared with last year, as operating margins are expected to dip 150 basis points year-on-year (40 basis points quarter-on-quarter) on an average.

Seasonally, Q4 is supposed to be a strong quarter, but this year volumes have been weak for the four-wheeler manufacturers. As a result, revenue growth is unlikely to be tepid for most players, other than Maruti Suzuki and Tata Motors. The successful launch of the Celerio and higher exports could aid revenue growth for Maruti. Tata Motors will yet again report weak, stand-alone numbers but strong profit growth on stronger Jaguar Land Rover numbers. Ambit Capital expects 11 per cent quarter-on-quarter growth in volumes to aid a modest growth in revenues sequentially. However, lower y-o-y volumes (decline of three per cent) would lead to a dip in revenue growth on a y-o-y basis.

The profit growth of most companies is expected to track weak revenue and volume growth. Operating profit margins are set to decline the sharpest for Bajaj Auto (by 120 basis points) and Hero MotoCorp (60 basis points). Lower operating leverage and marketing expenses incurred on launch of new Discover are expected to hurt Bajaj Auto and excise duty impact would hurt Hero. Despite this, analysts expect the two-wheeler automobile companies to fare better than the four-wheeler companies. However, the Street expects the two-wheeler players to outperform the passenger cars and commercial vehicle manufacturers. The decline in volumes is nearly over and that there may be some pick up in FY15.