“Weak product mix, elevated discounts, negative operating leverage, and unfavourable currency rates are the likely negative levers to margins. However, commodity prices remain benign, which provides some cushion,” wrote Nishant Vass and Pratit Vajani, analysts at ICICI Securities.
Passenger vehicles sales fell 28.7 per cent in the three months to September, the lowest in seven quarters, as the country’s economy slowed to 5.5 per cent weighing on consumer sentiments. Sales of commercial vehicles, three-wheelers, and two-wheelers slumped by 35 per cent, 6 per cent and 20.5 per cent, respectively, as firms snipped production and curtailed dispatches.
A negative operating leverage, coupled with high discounts, took a toll on earnings of passenger vehicle makers.
Maruti Suzuki India is estimated to report a net profit of Rs 1,053.88 crore, a drop of 53 per cent over a year ago. Mahindra & Mahindra, too, is likely to report a 36 per cent drop in net profit on net sales of Rs 1,068.88 crore over a year ago.
Consolidated losses at Tata Motors is estimated to widen at Rs 1,097.23 crore on the back of poor offtake of commercial and passenger vehicles in the domestic market and headwinds facing the UK subsidiary.
Though relatively better off than passenger vehicle makers, two-wheeler firms endured the pains of a demand slump and high costs. With the notable exception of Bajaj Auto, which is estimated to report an increase of 3.2 per cent to Rs 1,217.65 crore in its net profit, for others it was a quarter marked by a sharp dip in earnings. Net profit at market leader Hero MotoCorp and TVS Motor Co is estimated to have dropped by 16 per cent and 33 per cent, respectively.
A slowdown in the overall economy took the biggest toll on commercial vehicle firms, as reduced movement of goods and services during the quarter led to idling of trucks forcing transporters to postpone purchase. Ashok Leyland is expected to report an 85 per cent fall in its net profit to Rs 76.63 crore on net sales of Rs 3,904 crore, down 48.7 per cent over a year ago.
FY20 is expected to continue witnessing downward revisions of demand forecasts across categories. Also, persistently weak consumer sentiment remains a key impediment to sustainable recovery as discount-driven demand is unlikely to sustain, wrote Vass and Vajani.