Forex losses, demand dip dent auto firms profits

Written by Corporate Bureau | Mumbai, Jul 30 | Updated: Jul 31 2008, 06:29am hrs
The potholes are bumpier for the Indian automotive industry. Two large companies in the segment, Tata Motors and Mahindra & Mahindra (M&M), announced a decline in first-quarter profits on Wednesday, barely a week after market leader Maruti Suzuki said its net dipped as rising input costs squeezed margins. Forex losses, dearer inputs, waning customer interest in the passenger segment and high interest rates on vehicle loans weighed heavily on the results, and the fiscals remaining quarters look equally bleak.

Tata Motors on Wednesday said the companys profit after tax declined 30.13% in Q1 FY09 to Rs 326.11 crore, compared with Rs 466.76 crore in Q1 FY08. This was attributed to a notional valuation loss of Rs 199.88 crore on volatileforeign exchange rates, impacting long-term funds raised through foreign currency convertible instruments. Margins were further impacted in a challenging environment due to abnormal input material cost increases and general inflationary trends, the company stated.

Tata Motors also posted a 14.4% increase in revenues (net of excise) to Rs 6,928.44 crore for the quarter, compared with Rs 6,056.82 crore in the same period last fiscal. The companys stock was up 4.91% on the BSE to close at Rs 416.30. It also showed a one-time income of Rs 315.6 crore in the quarter accruing from the divestment of 24% stake in associate company Taco. This is the most challenging year for automobile companies, conceded Tata Motors managing director Ravi Kant.

Meanwhile, M&M reported a decline in first quarter net profit to Rs 159.3 crore, against Rs 191.2 crore over the corresponding perioda drop of 17%on the back of rising input costs and foreign exchange losses. However, the companys total income grew to Rs 3,332 crore in the quarter, compared with Rs 2,644.4 crore. M&M stock was up 2.66% on the BSEon Wednesday to close at Rs 513.50.

Caution was the word M&M chairman Keshub Mahindra chose when it came to the outlook for the current year. Citing the unfavourable economic conditions, including rising input costs, high interest rates and fuel prices, Mahindra said, Margins will definitely remain under pressure.

We see a year of economic turbulence, with forecasts for the next few months difficult to make. We do hope that subject to rains, a well dispersed monsoon will bring about good agricultural growth and that the services sector continues to be robust, Mahindra added.

The lower profits are mainly on account of an exchange loss of Rs 77.9 crore on account of the revaluation of $200 million FCCBs issued in April 2006, which is, in fact, a part reversal of the positive impact of such revaluation booked from the date of issue until end-March, 2008, stated a company release.

Echoing the sentiments of Mahindra, Tata Motors Kant said the price of steel, an essential input, has doubled.

He said the company is laying emphasis on new products to pep up demand: the compact sedan, the Sumo Grande and a new Indica that will be rolled out as soon as possible.

In the commercial vehicles segment, new products have already been launched. Some 12-15 products will be introduced by the fourth quarter. The new World Truck will also be rolled out in collaboration with Tata Daewoo Commercial Vehicles in Korea.

The company is also launching an aggressive cost reduction on one hand, and will not shy away from price increases owing to the higher cost of inputs like steel. In commercial vehicles, it increased prices in April by 3.5% and again affected a price hike in July.

One of the main reasons for sluggishness in the companys passenger car segment is the delay in the launch of the new Indica, said Kant.

The new Indica is a new platform altogether, and we want it to be of better quality. The delay is because we are taking time to reach certain levels that we are satisfied with for the car, Kant added.

In the medium and heavy truck segment, the amplitude of cyclicality is enormous, said Kant. Therefore, if we increase the portfolio of smaller commercial vehicles, it will help cushion the problem. The Ace and Swinger are aiding us in this direction, he added.

Reiterating the companys commitment to the Singur project and to rolling out the Nano from there, Kant said that the vehicle was on track to be launched later this year.

On further plans to market Jaguar-Land Rover, Kant said that these brands are already being aggressively marketed in new markets like Russia, China and the Middle East. Russia is the third largest, and China, the fifth largest market for Land Rover.

In M&Ms case, analysts had predicted a flat-to-positive performance during the first quarter. Pressure on raw material costs and foreign exchange losses have pulled down M&M profits this quarter, said an analyst from Religare.

Utilisation of new capacity and higher cost of operation remain the major constraining factors this fiscal, with the first half of the current fiscal unlikely to see good performance by any player, added another.