AutoCompanies headed for strong profit growth

Auto makers will likely shrug off the effect of higher expenses to register a surge in both revenue and profit when they announce earnings for the three months to 30 June, say analysts.

Auto companies will start reporting earnings on 21 July, when two-wheeler maker TVS Motor Co. Ltd announces its results for the first quarter of 2010-11.

A Mint survey of estimates from five domestic brokerages shows that most leading auto makers are set to post double-digit profit growth, reflecting the broader economy's health.

Truck maker Ashok Leyland Ltd and two- and three-wheeler maker Bajaj Auto Ltd are expected to lead the way in terms of growth in profit over the same period last year.

The brokerages polled are Angel Broking Pvt. Ltd, Prabhudas Lilladher Pvt. Ltd, Edelweiss Securities Ltd, Emkay Global Financial Services Ltd and Morgan Stanley.

The higher numbers are the result of a low base in the June quarter last fiscal, availability of low-cost credit and launch of new models of vehicles, especially in the passenger category.

Sales of passenger vehicles rose 32% to 554,000 units in the June quarter of the current fiscal, according to data from the Society of Indian Automobile Manufacturers.

Surjit Arora, auto sector analyst at Prabhudas Lilladher, said higher volumes are expected to lead to margin expansion because of better apportioning of fixed costs. "This is even as the raw material prices showed some signs of hardening from the previous quarter."

Most auto makers hiked prices by 3-4% in the June quarter to offset higher raw material prices. Ashok Leyland and Tata Motors Ltd are expected to report healthy earnings because of a revival in demand for commercial vehicles.

An average of the brokerages' estimates shows that Ashok Leyland, India's second largest truck and bus maker by volume, is expected to increase profit to Rs146.98 crore, an 1891% rise from a low base of Rs7.7 crore in the June quarter last fiscal.

The earnings of the Chennai-based firm were boosted by a 178% growth in truck and bus sales to 21,402 units.

Stand-alone revenue (excluding subsidiaries) at Tata Motors, the country's largest auto maker that also makes the world's cheapest Nano car, is expected to increase by more than two-thirds to Rs10,468 crore, while profits are expected to grow 70% to Rs374 crore.

Passenger car market leader Maruti Suzuki India Ltd is expected to continue its strong run despite the entry of newer compact cars from Ford, General Motors and Volkswagen.

With a 23% growth in unit sales to 242,887, analysts estimate the company's revenue will increase 29% to Rs8,263 crore, while profit is expected to increase 12% to Rs653 crore over the June quarter last year.

Revenue at Mahindra and Mahindra Ltd, which sells more than half the utility vehicles in India, is expected to increase 11% to Rs4,697 crore and profit to Rs438.18 crore, a 9.3% growth.

Analysts forecast profit at Bajaj Auto to jump 93% to Rs566.6 crore, while market leader Hero Honda Motors Ltd is expected to grow profit 14% to Rs573.68 crore.

However, in a 5 July report, analysts Deepak Jain and Chetan Vora of Edelweiss Research said Hero Honda has the potential to surprise on the higher side. Arora of Lilladher forecast that the September quarter may be even better, given that prices of metals such as steel and aluminium have fallen 10-12% since May.