Auto majors in fast lane
India’s auto majors continue to see strong growth in sales, but the impact on bottomlines is expected to be muted this time. Higher raw material costs are expected to hit the margins of auto firms for Q1 FY11.
Most brokers tracking the sector expect operating profit margin to fall by 0.4-1.0 percentage point. Apart from higher raw material prices, upgrades to engines to conform to new emission norms will also raise costs. Mahindra & Mahindra is one of the companies favored by almost all the brokerage houses — possibly because of its mix that includes utility vehicles, tractors and cars.
Ashok Leyland is another popular pick — the truck maker had seen a bad time last year and recovery is expected to be good. Sales volumes during Q1 continue to remain strong, says Edelweiss.
Commercial vehicle sales were up 61 per cent over the last year — although on a very low base.
However, the broker expects margins to be under pressure because of rising commodity prices.
Increasing competition has also played a role — restricting the abilities of companies to pass on price rises. This is particularly true for Maruti, says the brokerage, which is facing multiple new entrants.
Angel Broking expects the industry as a whole to record a 47 per cent jump in sales. However, with lower margins, the increase in profits is expected to be about 23.5 per cent.
Amongst the various players in the auto sector, commercial vehicle and tractor makers have been able to pass on increases in raw material prices, says IIFL.
On the other side, four wheeler maker are yet to take hikes and their margins may suffer going ahead.
Going forward, the auto sector is likely to see an annual growth of about 11 per cent over the next few years, says Angel, on the back of a robust economy.
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