Q1 earnings: Auto companies lag behind Street estimates by wide margin

Investor sentiment for a majority of auto companies has been muted after the first-quarter earnings showed that revenues 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 and Eicher Motors — reported net sales of Rs 811.49 billion against the Bloomberg estimates of Rs 830.79 billion, a lag of 14.80 per cent.

The aggregate net profits of these companies stood at Rs 74.28 billion against an estimate of Rs 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 profit 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 across all the segments reported double-digit growth of 18.1 per cent. It was 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, at Reliance Securities. Shah attributed the lower revenues of majority of the companies to a combination of factors including higher contribution of cheaper products in the overall sales mix, an 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 exclusion of 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 impacted 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 entry level models. Though Hero MotoCorp didn't make a mention of the pricing pressure during the call earnings call with its investors, the company is bracing itself for a price war unleashed by the Pune based firm, said another analyst. He declined to be identified. 

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 Rs 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 to date, the BSE auto index has underperformed with a muted 1.6 per cent gain. If one removes Maruti, which has been singly driving the market capitalisation, the BSE Auto Index shows a decline of 1.6 per cent. If one also takes out M&M in addition to Maruti Suzuki, the auto index shed 5 per cent in the same period.


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