Maruti Suzuki and Eicher Motors may post strong results despite demonetization because of the popularity of Vitara Brezza and Baleno, and Royal Enfield for the latter.
For automobile companies, the third quarter of FY17 is expected to be a weak one. This quarter, while the festive season boosted the sales books of the car companies, demonetization took the demand out of the market despite year-end discounts to clear stocks.
Demonetization is likely to have made its mark on the performance of all the automobile companies. However, two-wheeler companies (4% y-o-y) decline and three-wheelers (19% decline yoy) might have been the worst hit. This was largely on the back of a disruption in rural demand after the government removed 86% (in value) currency from the economy overnight.
According to automobile analysts Sneha Prashant and Abhishek Jain in an HDFC Securities report, "We expect 2W companies to have a tough quarter with EBITDA for Hero Motocorp/ Bajaj Auto declining by 27/17% YoY respectively."
“We expect negative operating leverage and rise in commodity prices to impact EBITDA margin of most automobile companies. Average prices of key commodities increased - CR steel sheet (up 26% QoQ) ,lead (up 14% QoQ) & aluminum (up 5.6% QoQ). The only exception was rubber prices, down 7% QoQ. Owing to liquidity crunch in 3QFY17, auto companies were unable to increase prices to offset commodity cost pressure,” they added.
The commercial vehicle space was also impacted due to demonetization as the working capital of fleet owners is largely cash based in nature. However, surprisingly CV volumes largely remained flat with a marginal growth of 0.6% YoY.
On the other hand, PV sales remained strong (+5% YoY) driven by high waiting period models like Vitara Brezza, Baleno, Fortuner, Kwid and Tiago.
The report said that Maruti Suzuki and Eicher Motors will report strong earnings growth while most other auto companies will likely struggle in this quarter. Eicher Motors reported strong volume growth for Royal Enfield which will help its earnings, while Maruti Suzuki’s earnings will be supported by its high selling model Baleno and Vitara Brezza.
However, the analysts believe that post demonetization there will be a revival in automobile demand in FY18 and FY19 on the back of an increase in government capital spending and focus on rural economy, higher rural income with normal monsoons, higher disposable income with roll-out of 7th Pay Commission, falling interest rates and a low base effect.
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