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In Q3, auto sector to report robust topline growth but low margins: Report

Press Trust of India/Mumbai 14 Jan 18 | 05:20 PM

Though auto companies are set for better revenue growth in the December quarter, primarily boosted by pick-up in rural demand and low-base effect due to the note ban impact, higher input costs and year-end offers would crimp their margins, says a report.

Most auto companies and ancillaries are likely to report double-digit revenue growth of 14-51 per cent during the third quarter, says a weekend report by HDFC Securities.

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However, higher commodity prices and festive/year-end offers/marketing spends will shave off the margins of most players to the tune of 84 bps for the industry sequentially to 15.4 per cent, warns the report.

"The auto sector is set for a robust revenue growth in third quarter led by a recovery in rural demand, healthy festive retail sales and low base effect owing to note-ban. However, higher commodity prices and increase in discount/incentives will restrict margin expansion," says the report.

Though passenger vehicles volume grew only 7 per cent despite favourable base in the reporting quarter, this will be compensated by better commercial vehicles volume which jumped 28 per cent, led by a revival in freight rates, pick-up in infra spending that ensured higher sales of higher tonnage trucks and tippers and low base effect.

Against this, two-wheeler volume soared 18 per cent driven by strong rural demand especially from Bihar, UP, Odisha and MP.

The quarter saw average price of key commodities increasing fast with steel prices rising over 6.2 per cent, lead over 7 per cent and aluminium jumping over 12.4 per cent. The only raw materials that saw a price compression was natural rubber which fell marginally by 1.4 per cent.

Commercial vehicles volume witnessed a healthy 30 per cent growth in the reporting quarter.

The industry saw a sequential increase in discounts as companies pushed inventory ahead of regulatory changes from January 1 (AC or blower is mandatory for N2 & N3 category vehicles).

Most auto ancillary companies are also expected to show strong numbers led by sturdy industry volume growth, and pass on the impact of higher input costs. Most auto ancillary companies are also expected to show strong numbers led by sturdy industry volume growth, and pass on the impact of higher input costs.

On the industry outlook, the brokerage said it continues to believe that the stage is set for strong demand for automobiles across segments on the back of an increase in government capex and focus on the rural economy, increasing per capita income and growing urbanisation, and falling interest costs and better finance availability.

On the industry outlook, the brokerage said it continues to believe that the stage is set for strong demand for automobiles across segments on the back of an increase in government capex and focus on the rural economy, increasing per capita income and growing urbanisation, and falling interest costs and better finance availability.

Ashok Leyland may lead the pack with a strong net profit growth of over 81 per cent year-on-year led by operating leverage benefit and higher volumes which rose 41 per cent and better tonnage mix, while Tata Motors is set to for a 54 per cent pre-tax profit on low base.

However, despite record sales led by the consistent success of the Ciaz, Brezza and Baleno, and incremental demand for the new Dzire, industry leader Maruti Suzuki is expected to post only a 14 per cent growth in top-line, while its margin is likely to contract 127 bps as benefits of stronger volume are expected to be offset by lower gross margins owing to the Gujarat plant ramp up.

In the two-wheeler space, Bajaj Auto's margins may expand by 50 bps led by robust three-wheeler sales and may see its topline jumping 24 per cent, but Hero Motocorp will see margins declining by 76 bps owing to higher marketing spends. Tata Motors may report a 10.3 per cent margins, while Mahindras will be amongst the lowest at around 3 per cent.

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