Car makers to have a smooth ride ahead

The Street expects the festive cheer to continue for car makers in October, as the festivals have gotten bunched in the same month.

The automobile sector is on a path to recovery, if September volumes are taken by.

After declining by five per cent in FY14, passenger vehicle sales have been growing in FY15.

The momentum has continued in September. Passenger car volumes have grown seven per cent in the year-to-date and dealer checks suggest that the positive momentum is expected to continue.

The performance of Honda, Maruti and Hyundai have all reported double digit volume growth, thanks to a spate of new launches.

The second quarter's earnings are expected to benefit from higher volume growth, as operating leverage and lower input costs would give a boost to margins.

The Street expects the sector to report a 150 basis point margin expansion. Some players would also benefit from a favourable cross-currency movement.

Antique Stock Broking sees Maruti Suzuki as a prime beneficiaries of favourable currency moves as dollar-yen strengthened to 108 from 102 levels last quarter, thus positively impacting its margins.

The brokerage expects Jaguar Land Rover to benefit slightly from a weaker pound-dollar and a stronger pound-euro.

Maruti is expected to report 150 basis point margin expansion sequentially. Maruti's earnings could jump 44 per cent year-on-year on strong volumes and better margin profile.

Tata Motors is expected to report stable gross margins, even though operating margins may decline 50 basis points on lower volumes and higher research and development expenses.

Hero MotoCorp is also expected to show a marked improvement in margins (300 basis points) as the royalty amortisation accounting comes to an end. Lower input costs would also aid profitability.

Bajaj Auto's margins are expected to expand 100 basis points, as volumes have recovered.

Also, with demand staging a comeback, the discounts offered by original equipment makers have declined.

According to JM Financial, discounts on Maruti Alto/WagonR are reduced by Rs 3,000-5,000 compared to last month.

Further, Maruti will also gain given that new launches like Celerio have no discount, thereby helping it bring down average discount levels, the brokerage adds.

The Street expects the festive cheer to continue in October, as the festivals have gotten bunched in the same month.