Auto companies lag behind estimates by wide margin

Investor sentiment for a majority of auto companies has been muted after the first-quarter earnings showed the reported revenue and profits varied from analysts’ estimates.

In a not-so-usual trend, the miss was most evident in revenue earned by companies during the quarter, even as profits and margins also lagged behind expectations. Eight auto companies — Tata Motors (standalone), Maruti Suzuki, Mahindra and Mahindra, Hero MotoCorp, Bajaj Auto, Ashok Leyland, TVS Motor Company and Eicher Motors — reported net sales of ~811.49 billion against the Bloomberg estimates of ~830.79 billion, a lag of 14.80 per cent.

Aggregate net profits of these companies stood at ~74.28 billion against an estimate of ~71.67 billion. However, without Tata Motors, which beat estimates both on profitability and Ebitda (earnings before interest, tax, depreciation and amortisation) by a wide margin, net profits would have been lower by 48.76 per cent against the reported figures.

The forecast lagged behind earnings despite robust volume growth, which came on the back of last year’s low base.

During the quarter, automobile sales in all the segments reported double-digit growth of 18.1 per cent. They were led by 19.91 per cent and 16 per cent growth in passenger vehicles and two-wheelers, respectively.

Also, this is despite some of them including Bajaj Auto, Maruti Suzuki and Ashok Leyland reporting record earnings. The trend reflects the pricing pressure facing the companies in an intensely competitive market.

Mitul Shah, vice-president, research, Reliance Securities, attributed the lower revenues of the majority of the companies to factors such as a higher contribution of cheaper products in the sales mix, and intensifying competition in both passenger vehicles and two-wheelers, which, in turn, has mounted pricing pressure on companies and a change in accounting standards.

“A few items which were reported under the revenue and getting subtracted from the expenses have been knocked out,” said Shah, citing an instance of dealer invoicing, which earlier would capture the prices, taxes and freight costs. The new standards suggest excluding these ancillary items from the revenue, he said. This too dented revenues.

During the quarter, Bajaj Auto cut prices of its entry-level models. This affected its rivals’ ability to pass on the full cost increase through price hikes even when raw material prices hardened.

In an earnings call with analysts, TVS Motor executives said the company hiked prices by 1.5 per cent across its model range but of entry-level models.

Though Hero MotoCorp didn't mention pricing pressure during the earnings call with its investors, the company is bracing itself for a price war unleashed by Bajaj Auto, said another analyst.

Even as Maruti Suzuki has been on a strong volume trajectory, it’s not insulated from pricing pressure. Ajay Seth, chief financial officer, Maruti Suzuki, said the average discount levels for its models had risen by ~1,000 quarter-on-quarter.

The lag in estimates has weighed on investor sentiment. Even as the Sensex has gained 7 per cent since the start of July, the BSE auto index has underperformed with a muted 1.6 per cent gain.

If one removes Maruti, which has been driving market capitalisation singly, the BSE auto index shows a decline of 1.6 per cent. If M&M too is taken out, the auto index shed 5 per cent in the same period.