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Auto firms' earnings seen hitting a roadblock

India's leading vehicle makers are expected to post poor earnings results for the April-June quarter due to falling demand and growing competition, analysts said.

Slowing industrial and agricultural production has dampened demand for vehicles of all sorts. Growth in industrial output slumped to 2.7 per cent in the 12 months to April, from a 6.5 per cent clip a year earlier.

Over April and May, two-wheeler sales inched up a mere 0.5 per cent from a year earlier, while commercial vehicle sales fell 19.7 per cent, tractor sales sank 17.2 per cent and new car sales slipped 5.98 per cent.

"Until the economy picks up, automobile companies cannot really post decent results," Milind Muchala, an analyst with Dalal & Broacha, said of leading firms Bajaj, Mahindra and Telco.

Bajaj Auto Ltd is India's largest maker by volume of two-wheelers, Mahindra & Mahindra Ltd, the largest tractor and utility vehicle manufacturer, and Tata Engineering and Locomotive Co Ltd, the leading truck maker.

A Reuters poll of 12 analysts released on Monday showed net profit is forecast to fall 34.23 per cent from the previous year at Bajaj Auto, and by 48.11 per cent at M&M. Telco is expected to post a loss of Rs 744 million, about the same as the loss it made a year earlier.

Sales are estimated to have fallen at all three vehicle makers -- at Bajaj by 16.55 per cent, at Telco by 14.52 per cent and at M&M by 6.54 per cent from year-earlier levels.

Compared to the previous quarter, Bajaj's net profit is estimated to have risen 11.86 per cent, and M&M's profit to have sunk 39.29 per cent.

Telco's loss is estimated to have halved from the Rs 1.47-billion loss in registered in January-March, the final quarter of the financial year for Telco.

Telco seen struggling

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

"It has lost market share to (main competitor) Ashok Leyland in commercial vehicles...and I don't see sales improving in the near future," says Karwa.

Telco's commercial vehicle sales plummeted 40.9 per cent and its combined cars and utility vehicle sales by 22.8 per cent in April-May compared to year-earlier levels.

Analysts expect some improvement in commercial vehicle sales around September as India's summer crop, expected to be good, begins to be sold and work on industrial projects in several states picks up.

Still Telco's shares are likely to struggle, with an improvement in overall economic growth later in the year offering the only possible trigger.

At Friday's closing price market price of 64.55 per cent, Telco's shares were down 43 per cent from their 52-week high of Rs 113.90 and up 11 per cent from the year low of Rs 58.

Bajaj on motorcycle ride

Analysts said Bajaj's scooter sales improved in the April-June quarter after it launched some new low-priced models, but this was at the cost of lower margins.

"Promotional expenses have been incurred for the new launches and these will yield results only over the longer term," said Manish Karwa, analyst with brokerage Pranav Securities.

Bajaj's motorcycle sales also improved in the quarter, mirroring an industry-wide trend.

Motorcycles sales in India have surged in recent years due to their greater fuel-efficiency, sturdiness and higher resale value. Their market share has doubled over the past six years and now stands at 60 per cent of the two-wheeler market.

But analysts said that higher costs would keep margins under pressure and the increase in sales volumes will not translate into higher earnings. The impact of cost-cutting efforts are also likely to come through only over the longer term.

Analysts said they had a hold rating on the stock, with an improvement expected only towards the end of the year when the benefits of a slew of new model launches kick in.

At Friday's closing quote of Rs 247.40, the shares are down 29 per cent from their 52-week high of Rs 350 and up 19 per cent from the year's low of Rs 208.

M&M hit by competition, dull farm sector

Mahindra, which leads volumes in both utility vehicles and tractors, has had problems in both categories.

Overall tractor demand has fallen because drought in certain areas has depressed agricultural output and farm incomes.

In utility vehicles, fierce competition from the Qualis, which Toyota Motor Co rolled out in India last year, has hit sales.

"Their margins are also under pressure because the soft-top Commander utility vehicles were banned in five states," says Muchala. Its overall vehicles sales in April-May are down 25 per cent by volume from year-earlier levels.

Industry officials have forecast overall tractor sales to fall a further five per cent in the current year -- following a 9.47 per cent decline in the previous year to March -- as the impact of last year's drought and weak crop prices continue to be felt.

Yet analysts see the firm's stock as offering some upside owing to its depressed valuation.

At Friday's closing price of Rs 79.75, the shares are hovering just above the year's low of Rs 79.10, but are nearly 58 per cent below their 52-week high of Rs 189.40.

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