New Delhi: The auto volumes in the last quarter of the previous financial year was fitful with continued upward momentum in passenger vehicles (PVs) and commercial vehicles (CVs). On the other hand, two-wheeler, three-wheeler and tractors posted weak numbers due to muted demand and a high base. Particularly, entry segment two-wheelers and scooters were the worst affected due to moderation in rural sentiments, which is one of their prime markets.
However, the PV segment fared better this quarter as OEMs diversified their sourcing basket. Similarly, the January-March period saw strong recovery in CV segment demand aided by improving fleet operators’ profitability and higher fleet utilization levels.
On the back of elevated commodity prices, persisting chip shortage, and weak two-wheeler segment demand major auto OEMs are likely to report nearly moderate revenue growth in Q4 FY22 while margins are expected to take a hit.
Axis Securities projected aggregate revenue of top realty players – Maruti Suzuki, Mahindra & Mahindra (M&M), and TVS Motors – to grow 3% year-on-year (YoY), while they expect profit after tax (PAT) to contract by 3% and EBITDA by 7% mainly due to commodity headwinds and supply chain constraints.
For auto ancillaries under its coverage, analysts at the domestic brokerage firm expect revenues to improve by only 1%, and EBITDA and PAT to decline by 18% and 28% respectively. “While revival in the OEMs production has aided revenue growth for ancillaries, the decline in margins is on account of raw material cost inflation and a lag in raw material cost pass-through,” analysts noted.
Uncertainty over commodity prices is expected to prevail over the near term. Moreover, for ancillaries, any impact of the lag in the commodity price pass-through may hurt operating margins further.
Factoring in cost pressures
Experts opine that the prices of major commodities such as aluminium, steel, and precious metals have inched up over the past two months on an already elevated base of Q3 FY22, which will negatively impact the gross margins of these companies. As per a report by Nomura Financial Advisory and Securities, commodity cost index shows PVs up by 250bp (basis points) and two-wheelers up 350bp from Q3 FY22 levels.
“Our analysis of commodity contracts and inventory suggests the impact is not likely to be meaningful in Q4FY22 and may only be visible in the first quarter of FY23,” added the brokerage firm.
Notably, prices of major commodities like steel are up by 4% and that of aluminium are up 17% sequentially while precious metal prices have inched up by up to 20% in the last quarter of FY22.
Going ahead, key factors to watch out for would be management commentary around future price hikes and potential demand outlook going forward. Nirmal Bang analysts reckon that rural sentiments will rebound amid improving incomes, which should support 2W volume while PV demand will remain robust amid new product launches.
“CV segment is expected to continue its growth trajectory in Q1 FY23. We also remain cognizant of increasing penetration of EVs, which is expected to impact the scooter segment. Commodity costs and pricing action will remain the key monitoring factors in the current high inflationary environment and heightened geopolitical uncertainty,” the domestic brokerage firm said in a note.
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Throughout the year, demand for motorcycles and scooters was impacted by rural distress and higher ownership cost amidst soaring fuel prices. Sales of two-wheelers, particularly motorcycles failed to gather momentum even during the festive months, leaving the companies burdened with a pile of unsold stocks. As a result, the overall sales of motorcycles fell below the 9-lakh mark for the first time since 2016-2017, SIAM report said.
All the segments except the two wheelers are in green. Passenger vehicle sales grew 13.2% to 30,69,499 units in FY 22 compared to 27,11,457 units in FY21. Sales of passenger cars stood at 14,67,056 units, utility vehicles at 14,89,178 units and vans at 1,13,265 units.
