Brokerages say the drop in volumes may be compensated by higher revenues on increased vehicle prices, but higher input costs may still pressure margins

The automobiles business has been largely healthy in the first quarter of 2011-12, driven by strong growth in the two-wheeler segment which has remained insulated from macro-economic headwinds. Higher interest rates and increased fuel prices have, however, had an impact on passenger car sales that have seen a significant decline during the three-month period.

But while volumes have been dropping, various brokerages suggest that a hike in prices of vehicles will bring in higher revenues for manufacturers, even if margins are slightly affected due to higher input costs, with the revision of prices with vendors.

Prabhudas Liladher Research has projected net sales for the auto sector in the first quarter at Rs60,586 crore and EBITDA of Rs7,956 crore which is a margin of 13.1%, indicating an average performance. Profit after tax (PAT) is estimated at Rs4,373 crore. EBITDA and margin percentage are indicators of profitability and these include other income as well.

The Moneylife Auto Index which comprises 14 companies fell 6% in the three months to 30 June 2011, against the benchmark Sensex which lost 3% in this period.

IDFC Research has projected a revenue growth of 19% for the auto sector and a 14% growth in profit after tax (PAT). The brokerage expects Bajaj Auto, Tata Motors and TVS Motor Company to register a slightly higher 15% PAT growth, but the rest of the industry will likely declare single-digit profit growth or decline. It is has been reported that most original equipment manufacturers increased their prices by about 2% in April this year.

Pinc Research says that after impressive volume growth in 2010-11, the auto sector is seeing a change in fortunes due to higher interest rates and fuel price hikes that have led to a sharp increase in the cost of ownership. But the two-wheeler makers have been largely unaffected on account of low dependence of finance and lower operational costs, which is reflected in the record quarterly volumes of Hero Honda, Bajaj Auto and TVS Motor, who should be able to maintain profitability sequentially. Bajaj is scheduled to announce its results on Thursday.

Prabhudas Liladher Research says Hero Honda accounts for 13.7% year-on-year growth in the domestic two-wheeler market. This strong growth is attributed primarily to the marriage season in the North and lower inventory levels with dealers, strong rural growth and less dependence on financing. The company has achieved a volume growth of 5.2% quarter-on-quarter as compared to a 7.4% decline by Bajaj Auto.

There is a gradual shift in consumer preference for diesel cars and this had cause an increase in the inventories of petrol cars, both at the dealers and at the companies. Maruti Suzuki suffered a setback on account of a labour strike at its Manesar plant coupled with the annual maintenance shutdown at the Gurgaon facility that led to a muted 3.9% y-o-y sales growth in the quarter.

Angel Broking said that while the two-wheeler segment should sustain its volume momentum, the cumulative effects of rising fuel prices, increased product prices and higher cost of financing are expected to affect the demand for passenger vehicles and medium and heavy commercial vehicles.

In auto ancillaries, Prabhudas Liladher, said better utilization in the first quarter and a recovery expected in the export market together with economies of scale, will help these companies post robust topline performances. Nevertheless, an increase in the cost of key raw materials like rubber, copper and aluminium will keep the profitability of these companies under check.

Ancillary companies under coverage of the brokerage are expected to post a growth of 25.2% y-o-y and a decline of 2.6% q-o-q in the topline, mainly from robust growth by Bharat Forge, on account of strong commercial vehicle sales and an improvement in demand for battery manufacturers.