During the first quarter of FY2017, automobile manufacturers are likely to report a moderate growth in net profit due to lower margin trajectory, says a research report.
In the note, Religare Capital Markets Ltd says, during the June quarter auto companies under its coverage are expected to report a moderate growth of 32% in profit after tax (PAT) compared with about 80 to 100% growth over the past three quarters.
"Only Mahindra & Mahindra (MM) and TVS Motors (TVSL) would see better margins on a quarter-on-quarter (QoQ) basis on a favourable product mix. Eicher Motors Ltd (EIM), TVSL, Ashok Leyland (AL) and MM would lead earnings growth on yearly basis aided by double-digit volume growth and better margins. Tata Motors would likely post a profit decline on yearly basis and Maruti Suzuki India (MSIL) a flattish PAT on lower volume growth and forex losses," the report says.
During the June quarter, volume growth in commercial vehicles (CV) moderated. Religare says, following a bumper March quarter, MHCVs saw a moderation in volume growth during Q1 of FY17, even as light commercial vehicle (LCV) volumes reported a gradual revival with low double-digit growth.
Similarly, after a strong volume growth during marriage season in April, two-wheeler reported moderate sales over next two months. "New launches continued to drive motorcycle and scooter volumes with Hero MotoCorp (HMCL) and TVSL posting 6% and 12% volume growth, respectively. While Bajaj Auto reported a 16% increase in its domestic volume, its overall sales during the June quarter declined 2% due to a 22% drop in exports. EIM's unit sales increased 38% due to a monthly rate of about 50,000 bikes in 2016," Religare said.
Among the two-wheeler makers, Religare sees only TVSL to report 110 basis points (bps) growth in margin due to operating leverage and a higher proportion of moped sales. Bajaj Auto would report a 50bps margin decline due to adverse product mix, while HMCL will have flattish margins during June quarter, the research note added.
Religare says, among four wheelers, only MM would see margin expansion of about 150bps led by strong growth in tractor volumes, which forms 38% of the automaker's overall sales. It says, "We expect AL’s operating margins to decline 270bps QoQ (-20bps YoY) due to lower volume growth. Tata Motors, on standalone basis, is likely to post an 180bps margin decline to 6.3% and a net profit of Rs1,150 crore helped by Rs1,500 crore JLR dividends; JLR too should post a 140bps QoQ decline in margins. We build in an 80bps (-230bps YoY) margin decline QoQ for MSIL due to forex headwinds."
"Overall, we expect moderate PAT growth of 32% YoY in Q1FY17 (vs. 80-100% PAT growth over last three quarters YoY) for its auto universe due to a lower margin trajectory. EIM(C) should show the highest growth in PAT at 68% followed by TVSL at 48%. AL and MM would post a profit growth of 19% and 8%, respectively, Tata Motors, on cumulative basis, a 17% decline, and MSIL a meagre 3% growth due to lower margins. We continue to believe that FY17 is the year of two wheelers," Religare concluded.