Weak sales, flash discounts to hit Indian auto sector’s profit margins in Q3

Commercial vehicle (CV) sales have disappointed, with a 22% drop year-on-year, and so did two-wheeler sales, which fell 13% from a year ago
By : mint_print
| Updated on: 17 Jan 2020, 09:26 AM
File photo used for representational purpose. (REUTERS)
File photo used for representational purpose. (REUTERS)
File photo used for representational purpose. (REUTERS)
File photo used for representational purpose.

After a double-digit drop in the preceding five quarters, the decline in auto sales moderated in the December quarter (Q3). Of course, performance differed across segments. Passenger vehicle sales led by market leaders Maruti Suzuki India Ltd and Hyundai Motor India Ltd were flat.

But commercial vehicle (CV) sales disappointed, with a 22% drop year-on-year, and so did two-wheeler sales, which fell 13% from a year ago. While the macroeconomic slowdown and higher axle-load norms weighed on CV demand, two-wheeler sales fell due to rural distress and rising unemployment.

Similar Cars

Find More Cars
Maruti Suzuki Alto (HT Auto photo)
Maruti Suzuki Alto
796 cc | Petrol | Manual | 22.05 kmpl
₹3.15 - 4.84 Lakhs**Ex-showroom price
Hyundai Casper (HT Auto photo)
UPCOMING
Hyundai Casper
999 cc | Petrol | Manual
₹4 - 7 Lakhs* *Expected Price
Maruti Suzuki S-presso (HT Auto photo)
Maruti Suzuki S-presso
998 cc | Petrol | Manual | 24.12 kmpl | 66 bhp
₹4.25 - 5.99 Lakh**Ex-showroom price
Maruti Suzuki Eeco (HT Auto photo)
Maruti Suzuki Eeco
1196 cc | Petrol | Manual | 16.11 kmpl
₹4.3 - 5.61 Lakhs**Ex-showroom price
Hyundai Santro (HT Auto photo)
Hyundai Santro
1086 cc | Petrol | Manual | 20 kmpl
₹4.67 - 6.47 Lakhs**Ex-showroom price
Tata Tiago (HT Auto photo)
Tata Tiago
1199 cc | Petrol | Manual | 19.8 kmpl
₹4.7 - 7.05 Lakhs**Ex-showroom price

Further, high discounts and marketing offers were doled out by all manufacturers to clear inventory of BS 4 vehicles. This is bound to impact average realization in Q3. Hence, aggregate revenue may contract by 5-7% year-on-year, but lower than the 12-15% decline in Q2.

FOLLOW US:Stay Updated with latest content - Subscribe us on
FOLLOW US:Stay Updated with latest content - Subscribe us on

The silver lining in the otherwise foggy outlook is that commodity prices have been benign, especially those of steel, aluminium and rubber, which should boost gross margins.

A report by Maybank Kim Eng Securities India Pvt. Ltd said higher discounts for clearing BS 4 stock coupled with an increase in operating costs to migrate towards BS 6 emission technology will drag Q3 margins down on a year-on-year basis.

But things will be better from a quarter-on-quarter perspective. Motilal Oswal Financial Services Ltd said: “The Ebitda margin for our universe (ex-JLR) will improve sequentially from the lows of Q2 FY20 after declining for five straight quarters to 11.3%, driven by favourable commodity prices and operating leverage following sequential improvement in volumes." Ebitda stands for earnings before interest, tax, depreciation and amortization.

Margin performance is expected to vary across firms. For instance, improving sales in China and the US, will aid Jaguar Land Rover Ltd’s (Tata Motors Ltd’s subsidiary) profitability. But, weak CV sales will drag its consolidated margins down. In the two-wheelers segment, Bajaj Auto Ltd’s exports will alleviate the pain of the domestic sales slowdown due to the high price of BS 6 vehicles.

Be that as it may, auto companies are continuing to battle the challenge of lowering the inventory of BS 4 vehicles and simultaneously bracing for the BS 6 emission era (from 1 April). Consumer behaviour in terms of advance purchases to avoid costlier BS 6 vehicles is uncertain, making the sales outlook uncertain for Q4 and the first two quarters of FY21.

While the Nifty Auto index had begun on a recovery path between July and November last year, it has underperformed the benchmark Nifty index in the last two months. This is not surprising given that hopes of a sustained recovery post-festive season hit a roadblock.

First Published Date: 17 Jan 2020, 09:26 AM IST
Recommended For You
View All
NEXT ARTICLE BEGINS

Please provide your details to get Personalized Offers on

Choose city
+91 | Choose city
Choose city
Choose city
By clicking VIEW OFFERS you Agree to our Terms and Privacy Policy

Dear Name

Please verify your mobile number.

+91 | Choose city