Input cost to take toll on auto cos Q3 profit

Auto majors top line in Q3 is set to see a surge due to festive demand, analysts said. The auto makers are likely to face margin pressure over raising raw material cost.

Revenue growth is expected to be led by Maruti, Mahindra & Mahindra (M&M), Hero Honda and Bajaj. Although the margins of auto players are under pressure, they have tried to dilute the impact of input cost inflation as much as possible through cost-reduction initiatives, improved operating leverage and by hiking vehicle prices. On an average, price of major raw material such as steel, aluminum, plastic and rubber increased by around 6.5%, 15%, 16.5% and 65.2% on y-o-y.

Auto index has outperformed Sensex by posting 7.4% gains in Q3. Sensex saw 2.2% gains. Tata Motors and M&M in particular outperformed the auto index by 11.6% and 4.7%, respectively. The upturn in volume witnessed in the H1 of the current fiscal continued during the third quarter too on the back of healthy festival demand. Further advanced buying in anticipation of price increase in the New Year due to higher input costs also boosted volume growth.

Vaishali Jajoo and Yaresh Kothari of Angel Research’s report states, the net profit of a few firms is expected to decline due to y-o-y increase in input costs. Angel tracks Ashok Leyland, Bajaj, Hero Honda, Maruti, M&M, Tata and TVS. The report projected a net sales growth at around 27% aided by year-on-year volume growth of 26%.

Motilal Oswal in its report said the volumes growth has been driven by economic growth, easy availability of credit and new products. It estimated that volume growth to touch 24.6% y-o-y while margins for the auto industry to decline from their peak in the second and third quarter in the previous fiscal due to raising raw material cost in the current financial year. Ebitda margins for the companies covered by Motilal is expected to decline by 10 basis points q-o-q to 12.5%. Exchange rate fluctuations have led to concerns about export revenue realizations, the cost of imported inputs, and the effectiveness of hedging practices followed by companies.