March quarter (Q4) earnings reflected two key elements of the auto industry. One was strong demand for vehicles across the board and the other was the fact that margins were maintained by firms despite rising costs.
Commercial vehicles were in the limelight. Tata Motors Ltd’s sales grew 34% and Ashok Leyland Ltd’s sales jumped even higher on a year-on-year (y-o-y) basis. Others such as Eicher Motors Ltd and even the commercial vehicle segment of Bajaj Auto Ltd measured up with double-digit sales growth.
Likewise, two-wheelers sales soared on rising rural consumption. Passenger vehicles also did well, but sales grew at a slower pace, with a shift towards larger passenger cars and utility vehicles.
Robust sales saved the auto sector from being singed by rising input costs. Steel and aluminium prices have risen 22% and 19%, respectively, in a year. So, operating leverage protected gross margin that improved or were stable y-o-y. Lower marketing expenses by prudent firms helped protect any drastic erosion in Ebitda (earnings before interest, tax, depreciation and amortization) margins, too, along with prudently lower marketing expenses incurred by most auto firms.
Ironically, Maruti that seldom disappoints the street, posted lower-than-expected Ebitda margin. But that was due to one-off expenses on employee costs and adverse currency movements.
On the whole, strong revenue driven by sales and stable margins translated into stellar Ebitda growth across firms.
Yet the Street did not celebrate the brilliant performance. For one, valuations are rich at 17-20 times estimated earnings for FY19. The BSE Auto Index has been range bound.
Investors are cautious as it’s an uphill path for auto firms in FY19. A high base for growth in revenue and profit, rising crude oil prices and expectations of higher interest rates, along with input cost pressures, may see the tide turn for the auto sector in the forthcoming quarters.