New Delhi: After months-long factory closure, lay-offs and slump in car sales during the first two quarters of FY21, the fall in vehicle sales were moderate in the quarter to December-end(Q3). The performance, indeed, differed across segments.In one of the toughest fiscal years in their history, the Indian automobile companies are likely to report healthy results in Q3 led by festive push, pent-up demand and low base owing to economic slowdown. From a broader perspective, rural and semi-urban demand remained robust supported by higher Kharif crop, better cash flows and good rabi sowing that ultimately drove strong demand for tractors, two-wheelers and entry-level cars during the last three months.
Between October and December-end, sales of Maruti Suzuki jumped 13.4% to 4,95,897 units majorly due to a stronger preference for personal vehicles instead of public or shared mobility. In the two-wheeler pack, Hero MotoCorp and Bajaj Auto reported 19.8% and 8.7% pick-up in volume at 18,45,274, and 13,06,810 units, respectively, in Q3 driven by resilient rural demand and festive sales .
Top automakers sales in Q3
| Companies | Q3 FY21 | Q3 FY20 | YoY (%) | QoQ (%) | Q2 FY 21 |
| Maruti Suzuki | 495,897 | 437,361 | 13.4 | 26.1% | 393,130 |
| M&M | 223,978 | 216,816 | 3.3 | 20.9 | 185,270 |
| Tata Motors | 150,958 | 121,463 | 24 | 4.1 | 1,06,888 |
| Hero MotoCorp | 1,845,274 | 1,540,868 | 19.8 | 1.7 | 1,814,683 |
| Bajaj Auto | 1,306,810 | 1,202,486 | 8.7 | 24.1 | 1,053,337 |
| TVS Motor | 989,517 | 821,521 | 20.4 | 14 | 867,834 |
| Royal Enfield | 199,668 | 182,791 | 9.2 | 32.7 | 150,519 |
| Ashok Leyland | 33,410 | 31,205 | 7.1 | 71.8 | 19,444 |
Initial indicators from leading brokerage firms indicate that tight cost controls and operating leverage benefits are likely to drive EBITDA margins.
Moreover, the relatively moderate year-end offers and marketing spend would further boost margins of automotive companies. Usually, the automakers line up a plethora of best deals and discounts in December to liquidate their stocks before the end of the calendar year.
ETAuto Research finds that the automakers offered 20%-25% less discounts in December 2020 as pandemic resulted in supply issues. While market leader Maruti Suzuki trimmed its discounts up to INR 68,000 for the 2020 year-end sale from INR 1.12 lakh in the previous year-end, new car makers like Kia offered no discounts due to the long waiting period.
Turning Corners
Experts opine that the revenue growth for individual players and the overall industry may be in line with the volume growth, but the overall profitability may vary.
The ICICI Securities analysts said that the OEM pack is seen leading the recovery in the third earning season of FY20 because of the sharp uptick on the volume front accompanied by flattish to mildly negative realisations sequentially. They expect top-line growth of 8% year-on-year (Y-o-Y) basis to INR 1.65 lakh crore for their auto universe (including Tata Motors) with corresponding margins at 11.6% and PAT de-growth of 10.7% YoY to INR 6,679 crore.
Another brokerage firm Prabhudas Liladhar expects margins of its OEM universe (excluding JLR) to expand by 90 bps YoY in Q3 FY21. “Among OEMs, M&M and Ashok Leyland margins are expected to expand 160bp YoY each to 16.4% and 7.2% respectively,” the brokerage firm said in a report.
According to Rahul Mishra, partner, Kearney, a global consulting firm, new product launches, aggressive marketing push, attractive promotions and relatively lower waiting period have been some of the reasons that worked on the supply side.
“On the demand side, there was clearly pent-up demand and an even stronger need to choose personal mobility over public/ shared mobility. It will be good to see a similar momentum in the CV and three-wheeler segments as well,” he added.
The operating profits of most of the parts suppliers and ancillary companies also had double-digit growth on account of sturdy industry volume growth, higher exports-mix and replacement revenue share.
Total top-line and bottom-line growth for the auto ancillary pack is expected at 10.1% YoY and 10.6% YoY, respectively, amid about 140 bps decline in the margin profile, as per an ICICI Securities report. “Minda Industries and Balkrishna Industries are seen having done well, courtesy a pick-up in demand from base industries (domestic PV, two-wheeler and global agri machinery sectors),” the report added.
Foggy outlook
The quarter saw the average price of key commodities increase faster with regional steel prices at about a decadal 20% high on a q-o-q basis. Zinc price increased by 13% q-o-q. Aluminium showed a moderate 2% q-o-q hike during the quarter.
Industry watchers say the sharp rise in raw material prices has elevated the input cost of the auto companies, though its impact in Q3 would be marginal. According to Rahul Mishra, many products are new launches for which the material cost may still not have stabilised. “It is quite likely that the OEMs chose to absorb the cost increase in the last quarter, but that is being passed on as price increase in this month,” he noted. On the outlook, experts estimate that higher input cost will remain a headwind going forward and would dent the margins in Q4.
