Automakers’ Q3 profit margins likely to have taken a beating

Owing to a tepid festive season and rising operating costs, automobile firms are likely to see profit growth remain flat in the third quarter of the current fiscal (Q3FY2019). 

Published: 11th January 2019 05:36 AM  |   Last Updated: 11th January 2019 05:36 AM   |  A+A-

Express News Service

Owing to a tepid festive season and rising operating costs, automobile firms are likely to see profit growth remain flat in the third quarter of the current fiscal (Q3FY2019).  According to brokerage firm Motilal Oswal (MO), auto stocks it covers are expected to report a 9 per cent year on year decline in profit after tax (PAT) on a strong base, the third consecutive quarter where profits have fallen.

Excluding Tata Motors, however, the auto universe is expected to post flattish profit growth. According to analysts, all auto segments faced slack demand during the quarter, affected as they were by increasing cost of ownership due to higher fuel, insurance and financing costs. 

Moreover, sales during the festive season were the worst recorded over the last half a decade, particularly in two-wheelers and passenger vehicles, as lower farm income dampened rural demand. Commercial vehicle demand meanwhile faced hurdles due to an increase in permitted axle loads and financing issues.
As per MO, EBITDA margin for its auto universe (excluding JLR) is likely to contract by 1.4 per cent year-on-year to 12.6 per cent owing to raw material inflation, currency depreciation and higher variable marketing expenses.

Almost all major automakers — except Mahindra & Mahindra — are likely to see margins contract like Bajaj Auto (-3.3 per cent), Maruti Suzuki (-2.6 per cent), Ashok Leyland (-2.5 per cent), Hero MotoCorp (-1.6 per cent), Eicher Motor (-1.4 per cent) and Tata Motor (-0.9 per cent). 

Prabhudas Lilladher (PL) also forecasts a muted quarter for auto companies. “We expect EBITDA/profit are likely to decline by 6.5%/2.3% YoY,” it said.  Reliance Securities (RS) says that despite decent revenue growth by firms under their coverage universe, net profit will remain flat due to margin contraction with firms displaying limited ability to pass on cost inflation. 

Inventory build-up due to a poor festive season also forced automakers to offer huge discounts, inflicting more pricing pressure. “Auto companies will record mixed performance with growth recorded by Escorts, Bajaj Auto, TVS and M&M, while companies like Ashok Leyland and Maruti Suzuki would report a decline. On the other hand, Tata Motors and Hero MotoCorp will report a flat performance,” RS said. 
Analysts feel that the ongoing contraction in profitability could continue during the current quarter too. 

Forward outlook

While Reliance Securities believes that higher monsoon deficits in a few rural regions could lead to lower rural incomes and spending until the next monsoon, Motilal Oswal analysts say they expect manufacturers’ margins to recover during the current quarter on the backs of better rural sales and an ongoing pick-up in economic activity

1.4% fall expected in Q3 EBITDA margins of automobile firms, says Motilal Oswal

6.5% fall in Q3 EBITDA margins of auto firms predicted by Prabhudas Lilladher

9% decline predicted in auto firms’ profits: Motilal Oswal

2.3% fall predicted in net profits by Prabhudas Lilladher

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