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February 13, 2008Visit us at www.sharekhan.com
Q3FY2008 Auto earnings review
Slowdown continues
The volume growth in the automobile sector was flat inQ3FY2008. This slow down in the growth was due to higherinterest rates, non-availability of funding due to creditcontrol and high base of last year in some segments. Withthe interest rates expected to decline in FY2009, revivalshould be in the offing. The sector is expecting excise cutsin the Budget for FY2008-09, which should further help therevival process. Also in some segments like CommercialVehicle (CV) segment, revival should come due to the lowbase in FY2008.
Domestic sales volumeOct-DecOct-Dec%M9%20072006yoyFY08yoy
Cars345,579307,77712.3866,75013.3Utility Vehicles88,64875,41917.5241,75413.9M&HCV69,88571,366-2.1184,679-4.0LCV67,41258,77514.7153,87214.33-wheelers92,341102,003-9.5276,362-7.8Other 2-wheelers378,148358,7995.41,113,77115.7Motorcycles1,821,1241,888,251-3.64,355,641-12.2
Total2,863,1372,862,3900.07,192,829-4.5
Sales growth
Despite low volume growth a change in product mix coupledwith price increase in some segments helped the sectorreport an average sales growth of 9.5% year on year (yoy)for Q3FY2008. Maruti Suzuki and Mahindra & Mahindra
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Results snapshot(Rs cr)SalesEBITDA margin (%)Adj PATQ3FY08Q3FY07% yoyQ3FY08Q3FY07Chg in bpsQ3FY08Q3FY07% yoy
Ashok Leyland1800.11777.61.39.010.4-14085.2108.4-21.4Tata Motors7251.86895.75.211.312.8-150406.54443.85-8.4Maruti Udyog46543664.227.013.114.7-160467384.821.4M & M2940.12576.114.111.312.0-70249.52423.1Bajaj Auto2501.72568.2-2.614.514.230357.1378.56-5.7
Industry total19,14817,4829.511.812.8-981,5651,5580.5
outperformed the industry growth rate, due to highervolume growth and change in product mix. Whereas, thetwo-wheeler and CV companies under performed the industrygrowth due to no volume growth and strong competitivepressures in the segment.
EBITDA margins
Earnings before interest, tax, depreciation and amortisation(EBITDA) margin in Q3FY2008 declined by 98 basis pointson a year-on-year (y-o-y) basis due to increase in rawmaterial prices and low volume growth, and as themanufacturers were unable to pass on the complete costincrease. However, there was some respite on a quarter-on-quarter (q-o-q) basis due to manufacturers adoptingmeasures to control costs, increase in productivity andhigher volume sales in Q3 due to festive season.
Profit after tax
The average adjusted industry profits for the quarter wasflat, except for Maruti Suzuki. Lower profit marginsfollowed by higher interest and depreciation costs led thesector report a net profit growth of only 1%. The reportedprofit after tax (PAT) growth was higher on account of higherother income and foreign exchange gain.
Price performance
The Sensex gave a 17% return in Q3FY2008; the BSE AutoIndex gave a 6.6% return during the period. The OriginalEquipment Manufacturers such as Tata Motors, Hero Honda,
 
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Sharekhan SpecialJanuary 08, 2008sharekhan specialQ3FY2008 Auto earnings reviewThe author doesnt hold any investment in any of the companies mentioned in the article.
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Bajaj Auto, Maruti Suzuki all under performed the BSE AutoIndex and the Sensex. Whereas, the auto ancillarycompanies such as MRF, Apollo Tyres, Exide and some othersoutperformed the BSE Auto Index as well as the Sensex.(83% of the overall two wheelers) registered a decline of 3.6% in sales volume during the quarter. This decline wasled by the fall in the 100cc segment sales, which droppedby 16.7% for the quarter, whereas the 125cc-250cc segmentgrew by 31.5%. Higher interest rates, higher down paymentdemands from financial institutions and lack of fundingfrom institutions impacted the demand in the segment.
Outlook
The growth prospects of the two-wheeler segment continueto remain weak, especially in the motorcycle segment. If the financing situation improves, the competitive pressuresare too high in the segment. Consequently product pricecuts and discounts will continue to prevail in the two-wheelerindustry. The operating profit margins are expected to beunder pressure, thereby lowering profitability.
Commercial Vehicles
The CV segment witnessed a nominal growth of 5.5% forQ3FY2008. The medium &heavy commercial vehicle(M&HCV) segment registered a decline of 2.1%, while thelight commercial vehicle (LCV) segment grew by 14.7%. Thegrowth in the LCV segment was driven by strongperformance from Tata Motors. The key reasons for thispoor volume growth was the high base of last year and thedifficulty in availability of finance.
Outlook
Growth in the CV segment is expected to revive from March-April onwards due to low base, easing of finance availabilityand improvement in freight movement. While long-termstructural demand drivers like infrastructure spending onroad construction projects and strong industrial growthcontinue to remain intact. On a longer-term basis, we expectthe CV segment to grow by 8-10%.
 
170001750018000185001900019500200002050021000October-07 November-07 December-0746004800500052005400560058006000Sensex auto Index
Trends across categoriesPassenger vehicles
The Passenger vehicle segment registered a growth of 13.3%for Q3FY2008. In the passenger car segment, Maruti Suzukiout performed the industry due to a low base of last yearand registered a growth of 18% for the quarter. Utility Vehicle(UV) sales grew by 17.5% during Q3FY2008.
Outlook
Rising disposable income, improving lifestyles and lowpenetration is expected to lead to good demand and growthfor cars in India. However the industry is getting verycompetitive and is expected to witness lot of new carlaunches. The segment is projected to grow at 12-15%.
Two wheelers
The two-wheeler segment reported a volume decline of 2.1%for Q3FY2008. Though scooter, moped and electric two-wheeler segment grew by 5.4%, the motorcycle segment
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