News Analysis

Auto majors hit a speed bump

Parvatha Vardhini C | Updated on December 30, 2018 Published on December 30, 2018

Face slowdown in sales growth, margin pressure

The auto sector began 2018 on a high note, with sales picking up after a lull due to the GST move in mid-2017. Benign interest rates, heating up of agricultural and industrial activity and better urban and rural consumption worked in favour of the sector. The sector ended fiscal 2017-18 with new vehicle sales showing a strong overall volume growth of 14.2 per cent. The trend continued into the first three months of this fiscal too, with the industry recording an overall new vehicle sales volume growth of 18 per cent in April-June 2018, thanks to the low base of the previous year due to the GST implementation. Rural consumption, which was growing faster than urban, helped car and bike sales. A pick-up in mining, road- building and haulage needs pushed commercial vehicle sales.

But things took a turn for the worse since then. Rise in fuel prices, higher insurance costs, a slowdown in vehicle loans from finance companies as well as a slowdown in rural demand from farm price crashes dampened sentiments. Overall volume growth in new vehicle sales has predominantly been in single digit since July 2018, with the festival season turning out to be a damp squib too.

Sales and profits slump

As a result of these factors, many listed auto majors saw sales growth dwindle as the year progressed. Take Hero MotoCorp for instance. In the quarter ended March 2018, the company recorded a robust topline growth of 23.7 per cent, which whittled down to 8.6 per cent in the September 2018 quarter. Apart from a cooling off in bike sales, Hero faced stiff competition from Bajaj Auto which ate into Hero’s market share in its bread-and-butter entry segment bikes. Profits for the company in the September 2018 quarter fell 3.4 per cent over the same period in the previous year. It had grown at a brisk 35 per cent in the January-March 2018 period. Mahindra and Mahindra too charted a similar trajectory over 2018. With global factors such as the Chinese slowdown, Brexit and the disfavour for diesel vehicles in Europe and the UK affecting Jaguar Land Rover in addition, Tata Motors posted huge losses in the June and September quarters.


Apart from challenges on the demand front, auto manufacturers faced margin pressures from a rise in input prices, particularly from the jump in crude oil. Besides, in many cases, the depreciation of the rupee made raw material imports costlier too. However, with the three-months ended March 2018 and June 2018 showing strong growth, the nine-month picture for many listed companies still looks bright.

Auto stocks battered

Thanks to the headwinds, most listed auto stocks were in the red, with some stocks such as Force Motors and Tata Motors even halving in 2018. But both sector-specific concerns as well as the volatility in the broader markets have ensured that stock valuations which catapulted in 2017, came down to more reasonable levels in 2018. For instance, market leader Maruti Suzuki trades at a trailing 12-month PE of 30 times now, from 39 times in the beginning of 2018. There was correction in mid-cap stocks also. TVS Motors’ valuation come down to a more reasonable 40 times, from 60 times in January 2018.

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