Except Maruti Suzuki, Eicher Motors, automobile companies to report weaker Q3 results

For automobile companies the revenues in Q3 FY17 is expected to be a weaker quarter. This quarter which has been a seasonally strong quarter with boost from higher sales during the festive period has taken a big hit as a result of demonetisation.

Although demonetisation has hit across the automobile, the worst impacted are the two-wheeler companies (4% decline year on year) and three-wheelers (19% decline year on year). This was due to the disruption in rural demand.

According to automobile analysts Sneha Prashant and Abhishek Jain in an HDFC Securities report said that they expect the net sales or EBITDA to de-grow by 2% or 0.8% YoY (exception being Tata Motors) and a 2% or -5% YoY for auto components.

“We expect negative operating leverage and rise in commodity prices to impact EBITDA margin of most automobile companies. Average prices of key commodities increased - CR steel sheet (up 26% QoQ) ,lead (up 14% QoQ) & aluminum (up 5.6% QoQ). The only exception was rubber prices, down 7% QoQ. Owing to liquidity crunch in 3QFY17, auto companies were unable to increase prices to offset commodity cost pressure,” they added.

However, two-wheeler companies are expected to have a tougher quarter with EBIDTA for Hero MotoCorp and Bajaj Auto declining by 27% and 17% YoY, respectively, said the report.

The commercial vehicle space was also impacted due to demonetisation as the working capital of fleet owners is largely cash based in nature. However, surprisingly CV volumes largely remained flat with a marginal growth of 0.6% YoY.

On the other hand, PV sales remained strong (+5% YoY) driven by high waiting period models like Vitara Brezza, Baleno, Fortuner, Kwid and Tiago.

The report said that Maruti Suzuki and Eicher Motors will report strong earnings growth while most other auto companies will likely struggle in this quarter. Eicher Motors reported strong volume growth for Royal Enfield which will help its earnings, while Maruti Suzuki’s earnings will be supported by its high selling model Baleno and Vitara Brezza.

However, the analysts believe that post demonetisation there will be a revival in automobile demand in FY18 and FY19 on the back of an increase in government capital spending and focus on rural economy, higher rural income with normal monsoons, higher disposable income with roll-out of 7th Pay Commission, falling interest rates and a low base effect.