Facing demand headwinds and higher expenses, auto makers are likely to witness a decline in earnings for the last quarter of the recently concluded financial year 2018-19 (FY19). Tepid sales over the last six months has led to higher levels of inventory in retail showrooms and dealerships, which has resulted in production cuts by major auto-makers.
“All auto segments faced demand headwinds in Q4FY19 — a trend similar to the previous quarter… Auto universe is expected to report a 28 per cent year-on-year (y-o-y) profit after tax (PAT) decline on a modest base (6 per cent y-o-y growth in base quarter) – a fourth consecutive quarter of double-digit PAT decline,” Motilal Oswal (MOSL) said in its Q4 preview. The firm went on to add that even after excluding Tata Motors, its auto universe is expected to post a PAT decline of 16 per cent y-o-y.
Other brokerages concur. Reliance Securities (RS) in its Q4FY19 results preview said that it estimates a significant fall in earnings for the sector with most companies likely to report y-o-y declines. RS pegged the fall at 25.6 per cent in PAT for auto and auto ancillaries in the quarter. As for Prabhudas Lilladher, anticipates “yet again... a muted quarter for auto companies... since EBITDA/profit is expected to witness a sharp decline of 22/37 per cent y-o-y (on a high base)”.
According to available data from the Society of Indian Automobile Manufacturers (SIAM), passenger vehicle sales declined by 2 per cent year-on-year during the quarter while two-wheeler sales fell by a sharp 9 per cent. Even commercial vehicle sales only recorded a marginal growth of 1 per cent over the same period last year.
“In the past few months, we have faced many challenges. Market sentiment continues to remain muted because of a host of reasons such as higher commodity prices which prompted companies to hike vehicle prices, increase in upfront insurance premium cost, a liquidity crunch at funding companies and higher fuel prices. Sales are expected to remain on the lower side till the elections,” SIAM president Rajan Wadhera said recently. However, he expects sales to pick up post elections, with the second half of the fiscal witnessing pre-buying ahead of BS-6 regulations which will go into effect from April 2020.
Company-wise, almost every firm is expected to post an earnings decline. While brokerages expects 5-6 per cent y-o-y net profit decline for Bajaj Auto, they peg a double digit fall for Hero MotoCorp, Tata Motors and Mahindra.The earnings before interest, tax, depreciation and amortization (EBITDA) margin is also expected to decline. “EBITDA margin for our OEM (ex-JLR) universe is likely to contract for the third consecutive quarter by 120 basis points (bps) y-o-y to 12 per cent due to negative operating leverage and higher variable marketing expenses,” MOSL estimated.
The brokerage added that while almost all auto-makers (except TVS Motor and Tata Motors South Africa) are likely to see a y-o-y margin contraction, Maruti Suzuki, Ashok Leyland and Bajaj Auto are expected to deliver a quarter-on-quarter margin recovery.Brokerages expect the muted trend to continue for a few more months. “We expect the demand environment to only improve from Q2FY20 with pre-buying to kick start ahead of BS-6 implementation; however, the strategy around BS4 inventory management in Q4FY20 will determine the overall FY20 performance,” MOSL said.
Earlier this week, SIAM forecast passenger vehicle sales to grow 3-5 per cent, two-wheeler sales to grow 5-7 per cent, three-wheelers sales to grow 7-9 per cent and commercial vehicle sales to grow 10-12 per cent in FY20 compared to FY19 sales. However, the increase in regulatory costs in order to comply with BS6 emission norms is likely to take a toll on demand post FY20, since players would have to pass on the higher cost to consumers to tackle consequent pressure on their margins.
Sales forecast positive
SIAM has forecast that passenger vehicle sales would grow 3-5 per cent, two-wheeler sales would grow 5-7 per cent, three-wheelers sales would grow 7-9 per cent and commercial vehicle sales would grow 10-12 per cent in the new financial year FY20 compared to FY19.