Of course, the magnitude of the impact will vary depending on the extent to which currency volatility has been hedged
After being hit by spiralling raw material costs for several quarters, auto makers would have gained from softer commodity prices in the June quarter (Q1). But unfavourable and volatile currency movements played spoilsport. Prices of aluminium and steel dropped from the December quarter, as did that of rubber.
An 8% depreciation in the Indian rupee against the dollar in the period would have negated these gains because auto firms import key raw materials, which become more expensive. Passenger car maker Maruti Suzuki India Ltd and two-wheeler leader Hero MotoCorp Ltd are likely to take a hit on imported raw materials and components, besides royalty payments. A preview report on the sector by Antique Stock Broking Ltd says, “Hero’s Japanese yen-denominated fixed royalty expense, which stood at around Rs. 205 crore in 4QFY12 (fourth quarter of fiscal 2012) is likely to revert to the around Rs. 220 crore level in the first quarter of FY13 (similar to the third quarter of FY12 levels).”
Of course, the magnitude of the impact will vary depending on the extent to which currency volatility has been hedged. For example, analyst reports express concern that Maruti has hedged its forex exposure up to the first six months of FY13, but given the currency volatility, fresh hedges are likely to be less attractive for the company. In the case of Bajaj Auto Ltd, a report by Prabhudas Lilladher Pvt. Ltd said that average realization per vehicle is expected to increase only by 2.4% year-on-year (y-o-y) as exports have been hedged at Rs. 51 to the dollar, restricting the benefit of a greater slide in the rupee.
Further, the June quarter will not see any gains because of operating leverage on account of strong volumes. Most brokerage firms that track the top five listed companies in the auto universe (Tata Motors Ltd, Maruti, Bajaj, Hero and Mahindra and Mahindra Ltd) reckon that June quarter aggregate sales volume grew by a mere 8% over the year-ago quarter, the lowest quarterly performance in three years.
Of course, the biggest slowdown was in the passenger car and commercial vehicle (medium and heavy truck) segments, while utility and light commercial vehicles fared a tad better. Two-wheeler segment volumes slowed to single-digit y-o-y growth for the first time in these years. This will change for the better only if fuel price hikes are contained and if interest rates start falling.
Undoubtedly, lower volumes and foreign currency volatility will weigh on the June quarter’s profitability. Brokerage firms’ consensus points to an average 150-180 basis points dip in y-o-y operating margins. Meanwhile, even the profitability of firms such as Bajaj, which is better than others in the universe because of its three-wheeler sales, will also see a margin contraction as exports of these vehicles to Sri Lanka suffered a setback in the quarter.
In the final analysis, the auto sector is likely to post a mere 8-10% y-o-y growth in net profit during the quarter. The Street already seems to have factored this into valuations. The BSE Auto Index, which was steadily outperforming the benchmark Sensex even as other sectoral indices were stumbling, has finally cooled off and underperformed in the last three months. The only trigger that can lift sentiment is higher volume, which in turn will be the result of lower cost of ownership of vehicles.
