Rural recovery, low base effect seen boosting auto firms’ Q4 earnings

NEW DELHI: Automobile companies are set to report strong revenue and operating profit growth in the March quarter because of a revival in rural demand and a low-base effect as the negative impact of demonetisation lasted well into the fiscal-fourth quarter of the previous year.

Most auto makers are also expected to report expansion in margins from a year earlier as they raised prices, according to estimates of four brokerages— HDFC Securities, Emkay Securities, Nirmal Bang Institutional Equities, IIFL institutional equities.

Sales of two-wheelers have increased 25% in the quarter ended March 31, driven by higher demand for cheaper motorcycles.

Sales of commercial vehicles rose 29% because of increased spending on i nfrastructure development by the government and easier availability of finance options for small and light commercial vehicles.

Input prices continued to rise during the quarter. Prices of steel sheets, used to make vehicles, increased by 12.5%.

Operating margins of vehicle makers, except Tata Motors Ltd, are expected to widen for the third straight quarter, according to analyst estimates. Among two-wheeler makers, Bajaj Auto and Hero Motocorp may report operating margin expanded in the fourth quarter.

The revival in sales of commercial vehicle, motorcycle and tractor sales during the quarter will boost earnings of companies including Mahindra and Mahindra, Ashok Leyland, Hero MotoCorp and Bajaj Auto.

With strong volume growth and operating leverage benefits coming in the fourth quarter, companies are expected to report improvement in margins correspondingly, according to Gaurant Dadwal and Vivek Sarin, analysts at Nirmal Bang Institutional Equities.