Search the Internet          Tips  Sites: Finance, Investment

Q1 lousy, outlook uncertain for vehicle makers

India's leading automobile companies posted lower earnings in the April-June quarter, hurt by falling demand in a slowing economy, and analysts said an improvement could be at least two quarters away.

But there were also some benefits in the quarter, the first in India's 2001-02 financial year, as a depressed market pushed companies to cut costs, they said.

"Until the economy picks up, automobile companies cannot really post decent results," Milind Muchala, an analyst with Dalal & Broacha, said.

But favourable monsoon rains in many parts of the country could help demand later in the year.

India's slowing economy has dampened buying across most segments of the automobile market, with commercial vehicle and tractor sales falling sharply in the quarter. Only cars and motorcycles sales grew.

India is a huge manufacturer of tractors and commercial vehicles owing to the importance of agriculture in the economy and the need to transport goods over vast distances. The private car market is smaller by comparison.

Reflecting the overall trend, Mahindra and Mahindra Ltd, the leading tractor and utility vehicle maker, and Tata Engineering and Locomotive Company Ltd, the country's largest truck maker, posted worse-than-expected losses in the quarter.

The losses have dragged down their share prices and analysts predict possible gains only in the October-December quarter, when a good summer crop, helped by a bountiful monsoon, is expected to trigger stronger demand.

Profits of Bajaj Auto Ltd, the country's largest scooter maker, fell 36.5 per cent before being rescued by one-time income from an insurance subsidiary. Including that, profit grew a moderate 2.2 per cent.

"Overall, bottomlines have been lower year-on-year, but both Bajaj and Telco were able to meet their objectives of cost reductions," an analyst with an Indian unit of a US brokerage who declined to be identified said.

Mahindra swung to a Rs 296.2 million loss in the quarter from a profit of Rs 342.8 million in the year ago period. Telco reported its net loss widened to Rs 989 million owing to lower other income and higher extraordinary expenses.

Telco's losses to continue

Analysts don't foresee Telco returning to profitability any time soon as the sluggish economy depresses demand for trucks, its main money spinner. Its decision to invest over Rs 17 billion to begin making the only indigenously developed passenger car is also hurting earnings.

Analysts expect commercial vehicle sales to improve by 5-7 per cent in the full year to next March, and the upturn in the second half to offer an upside to Telco's beaten down stock.

Despite substantially lower sales in the first quarter, Telco's operating profit margin improved to 8.88 per cent in the quarter from 8.55 a year ago and 6.31 per cent in the full previous year to March.

Telco is aiming to save Rs 2.25 billion in costs this year and analysts said the impact would be enhanced by improved sales volume, widely expected from October.

Telco's shares on Wednesday fell 3.6 per cent to Rs 68.50, while the benchmark index fell 1.35 per cent. The stock is up 18.1 per cent from its April low of Rs 58 but 39.9 per cent off its February high of Rs 113.9.

Scooters a worry

Analysts see scooters, Bajaj's mainline business, as continuing to be a risk. Scooter sales have suffered in the past few years due to consumer preference shifting to motorcycles.

But recent successes with low-priced models would help soften the impact.

"In two-wheelers, we expect a eight to nine percent (sales) growth in the full year mainly contributed by motorcycles and ungeared scooters," said Maninder Gupta, an analyst at SBI Caps.

Bajaj's success in holding on to operating margins in the quarter, amid flat sales in a competitive two-wheeler market, also pointed to cost reductions, analysts said.

Further cost cuts over the next two quarters and improving motorcycle sales, part of an industrywide trend, could improve future earnings for the two-wheeler maker.

The receding threat to Indian two-wheeler makers from cheaper Chinese imports should also improve valuations.

India lifted licencing restrictions on automobile imports in April that led to fears of cheaper Chinese two-wheelers swamping the market. But it has since raised tariff barriers and imposed more exacting import regulations.

Bajaj's shares ended nearly flat at Rs 254.95 on Wednesday at the Bombay Stock Exchange.

The shares are up 22.6 per cent from their year's low of Rs 208 but down 27.2 per cent from the high of Rs 350.

Mahindra has seen its worst

Mahindra, which leads volumes in both utility vehicles and tractors, has had problems in both categories. Overall tractor demand has fallen because of an earlier drought in certain states which depressed agricultural output and farm incomes.

Analysts said the fall in tractor sales in the first quarter of the financial year would take at least another two quarters to reverse while the utility vehicles market was, at best, likely to remain flat.

Tractors should improve from current levels in the third quarter of the financial year when the summer crops, expected to be good, begin to be sold, they said.

But they said Mahindra's share had factored in the worst and could only improve from here on.

Mahindra's shares ended up one per cent at Rs 69.10 on Wednesday at the Bombay exchange, just off the year's low of Rs 67.10 hit on July 31. The share is 63.5 per cent off its year's high of Rs 189.40 hit in February.

Tell us what you think of this report