The auto sector is doing well. Healthy volume growth across categories means earnings will continue to grow in the first quarter of the current fiscal. Sales have remained reasonably robust, indicating underlying demand strength.
The industry has passed on higher costs via increase in prices. Overall consumer sentiment has also improved.
The quarter will see strong auto sector earnings, but headline growth rates might moderate in the second half of the current fiscal as base effect kicks in, said analysts tracking the industry.
An analyst with HDFC Securities said that strong rural demand and overall strength in the economy led to robust volume growth across categories in the quarter. Volume growth will be range-bound between 15-20% across the product categories of some OEMs, the HDFC Securities analyst said.
Capacity constraint at auto majors remains an issue. In some cases, dealers even indicated loss in sales due to stock-outs resulting from shortage in supply from original equipment manufacturers (OEMs).
An analyst with Motilal Oswal Financial Services said that supported by overall improvement in consumer sentiment, availability of fresh credits and new product launches, volumes grew substantially in the first quarter. This would help companies post better margins. The analyst added margins will decline from the peaks of quarter 2 and quarter 3, driven by raw materials cost push.
The impact will be partly offset as automakers partly passed on the cost increase and higher operating leverage.
It is estimated that the EBITDA margins will moderate by 40 basis points (bps) q-o-q (down 70bp y-o-y) to 13.5% in Q1 FY11 and 80bp decline in FY11.
Margins are expected to tail off from the peaks of the third quarter and there is no expecttation of a reversion to mean due to strong volume growth, relatively higher pricing power, cost controls, and increasing contribution from plants enjoying fiscal incentives, the analyst added.
An analyst from Edelweiss said volumes for the quarter remained strong across segments. Despite the first quarter being seasonally weaker than the quarter 4 of the last financial year, two wheelers reported strong sequential volume growth.
Demand for commercial vehicles remained robust with volumes rising 61% y-o-y, albeit, on a low base. Price hike in the 2-3% range were taken by all OEMs to partially mitigate against rising raw material costs.
?We expect margins to remain under pressure considering the rise in commodity prices. The EBITDA margins expect to decline around 40-100 bps sequentially,? the analyst pointed out.