Automobile Industry Goes Flat

FY13 was a bad year for the automobile industry. Sales were under tremendous pressure in all the segments of the sector, barring utility vehicles (UV) and light commercial vehicles (LCV). Rising fuel prices, high interest rates and weak industrial output contributed to a downfall in sales volumes across the board. So much so, consumers did not even react well to heavy discounts, schemes and offers that flooded the markets from the festive season till recently. The once nimble industry turned arid with declining sales and no signs of improvement.

Although sales trends in the four-wheeler market are clear, listed entities have to be looked at individually due to their distinct and unique nature.

Maruti Suzuki (MSIL) had a rough year that was blotted by the Manesar incident. Sales dropped during and after the episode due to a lockout at the plant. But volumes jumped in the next couple of months due to a piled up order book. Once production came back to normal, sales volumes returned to moderate levels. In FY13, sales volumes saw an increase of 3.33% compared to FY12. Since FY12 was turbulent as well, with production shut for about 60 days, comparative financials are expected to be moderately better in the FY13 results.

Tata Motors, because of its large presence in commercial vehicles and its underperformance in passenger vehicles, saw a bad year. Total sales volumes in FY13 saw a decline of 10.66%, on a yearly basis. This has impacted revenues and profitability, as seen in the previous quarters. However, it is more important to look at its figures on a consolidated basis since Jaguar Land Rover (JLR) contributes to 65-70% of Tata Motors’ revenues and over 90% of its profits. JLR’s volumes have been extremely robust due to the boost in Chinese sales and due to the success of models like Evoque. This is expected to significantly boost Tata Motor’s revenues. However, there has been pressure on the margins due to the larger sales volume of cars with a lower margin. This is expected to weigh on the margins of Tata Motors.

M&M has a strong presence in the only two segments doing well, UVs and LCVs. These two segments contribute to more than three quarters of M&M’s sales volumes. Although volumes in medium and heavy commercial vehicles, tractors, two-wheelers and passenger cars have been lethargic, total volumes went up by 16.60% in FY13, which is outstanding as compared to any other automobile manufacturer. Financially too, volumes have been working well since the beginning of the year. This trend is expected to continue into Q4FY13 and thus add to the strength of FY13 figures.

In case of two-wheelers, their performance has been moderating through the year. Sales volumes have been inconsistent and companies like Hero MotoCorp and Bajaj Auto have been facing frequent ups and downs. Overall, volumes for the two declined by 2% and 2.58% respectively in FY13, over the previous year. Amid a poor demand and intense competition, TVS Motors lost out on a sizeable amount of its market share. Its volumes saw a decline of 7.55% over the previous year. Considering this, we expect the financial performance of listed two-wheeler companies to be lacklustre.

Overall, the year was not favourable for the automobile industry. However, there have been a couple of rate cuts recently, which are likely to ease some of the pressure as the high cost of funding remained one of the key factors for this downward trend in demand. With some easing in pressure, the industry is likely to show signs of improvement starting Q2FY14.