You are here: Home » Opinion » Financial X-Ray
Business Standard

Auto sector expects H2 to be better

Most players reporting an expansion in gross margins on lower commodity prices

Malini Bhupta  |  Mumbai 

Auto sector expects H2 to be better

The second quarter has been a mixed bag for the automobile sector. While volumes of two-wheelers and tractors continued to decline, passenger vehicles continued to grow. Lower commodity prices helped prop up profitability, with most players reporting an expansion in gross margins. Auto companies expect the second half of FY16 to be better than the first half, as the industry hopes that sentiment may pick up. Managements of most auto majors expect some recovery in the second half, with festive season likely to kickstart demand, aided by a weak base from last year, says Emkay Global

The sector's revenue growth was not only impacted by the divergence in the performance of two-wheelers, tractors and PVs, but also by the under-performance of Tata Motors. What dragged the sector's headline performance was the weak performance of Tata Motors during the quarter. Excluding Tata Motors, the revenues of automobile manufacturers grew at 10% compared to the corresponding quarter last year. The same would be a tepid 5%, if one factors in performance of Tata Motors, which was hit due to vehicles getting damaged at a Chinese port during the quarter.

Ashok Leyland, Eicher and MSIL reported very strong revenue growth at 54%, 37% and 13%, respectively.

Amongst ancillaries, Motherson Sumi reported a 15% YoY growth in sales. The operating income of these companies was also among the highest in the sector.

Despite weak lower volumes reported by some companies, the sector managed to surprise positively on the margin front as average realisations improved for many players. Lower commodity prices also came to the rescue. Even though many companies launched new passenger vehicles, margins were not impacted. According to Antique Stock Broking, Hero MotoCorp, M&M, Bajaj Auto, Maruti, CEAT and JK Tyre beat margin estimates by 50-200 basis points. Tata Motors, Apollo Tyres and Bosch disappointed on margins. Analysts believe that business to consumer businesses have better pricing power which is why they have fared better as far margin expansion is concerned compared to business to business players (auto ancillaries).

Higher margin trajectory has made two-wheeler players attractive to investors, despite weaker volumes. Religare Institutional Equities continues estimates for Mahindra & Mahindra, as its volume growth momentum should pick up with new auto segment launches in second half. The brokerage expects Ashok Leyland and Maruti to continue to perform on both volumes and margins, while it has cut margin estimates for Tata Motors due to weak performance of Jaguar Land Rover.

Dear Reader,


Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

First Published: Wed, November 18 2015. 18:48 IST
RECOMMENDED FOR YOU
.