Higher volumes, price rises to aid growth in sector revenues

Passenger and commercial vehicles (CVs) saw strong uptick in demand in March, with diesel vehicle sales surging after the Union budget imposed no extra tax on these, according to BRICS Research. Maruti Suzuki, Ashok Leyland, Tata Motors (standalone) and Mahindra & Mahindra’s utility vehicles segment have seen a strong sequential improvement in volumes.

This and full-quarter benefits of price increases should boost sequential revenue growth this quarter, with Emkay Research expecting sales growth of 15 per cent year-on-year and 17 per cent quarter-on-quarter.

Two-wheelers have made rough weather of it, with Bajaj Auto’s 10 per cent sales growth being largely export-driven, and both TVS and Hero MotoCorp seeing flattish sequential volume growth.

Volumes, lower costs aid margin

Four-wheeler revenue growth is expected to translate to better operating leverage, with sequential expansion of operating profit margins. This should play out most dramatically for Ashok Leyland, which also sees higher production from its Pantnagar factory, and Maruti Suzuki (at 330 and 260 basis points sequential improvement, respectively), according to Emkay Research estimates for the fourth quarter of 2011-12. The margins would also benefit from stable metal prices.

The forex movement this quarter would marginally boost operating profit margins for Bajaj Auto and Hero MotoCorp. The full impact of adverse forex rates in the second quarter and higher royalty payment will compress operating margins by 210 bps y-o-y for Maruti. Religare Research sees a relatively benign environment on the commodity and currency front.

Higher PAT growth

Consequently, Emkay Research sees adjusted profit after tax increasing 31 per cent y-o-y and 23 per cent q-o-q to Rs 7,000 crore, though this would be more modest without Tata Motors’ subsidiaries, to about five per cent y-o-y and 33 per cent q-o-q to Rs 3,600 crore. The strongest sequential performers expected include Ashok Leyland (190 per cent), Maruti (173 per cent), mainly because of operating leverage benefits and favourable forex or metal contracts.

Outlook

The 2012-13 outlook is hinged on how demand plays out after the price increases and the monsoons, a key determinant of rural appetite for two-wheelers and farm equipment such as tractors. Other monitorables, according to Emkay, include performance of launches across companies, discount levels driven by competitive intensity, raw material contracts (input costs) and currency swings which would influence forex outlook and impact. Capacity ramp-up for Hero MotoCorp, Ashok Leyland (LCV and Pantnagar production) and Maruti (diesel car production) are other focus areas. Jaguar Land Rover performance in China and new launches will be key for Tata Motors.

Emkay sees a delay in cyclical demand recovery for four-wheelers after the budget due to expectations of fuel price rises and prefers two-wheeler makers. However, Religare focuses on a softer interest rate scenario as the basis of sustained CV demand (Leyland and Eicher being key picks). Maruti makes the cut as a consumption play.