Two-wheeler firms' profits to slow down following a double-digit decline in sales.
After riding to record profits in the financial year’s second quarter (July-September), Hero MotoCorp and Bajaj Auto, the top two by sales in two-wheelers, are likely to post a decline in revenue and profits for the October-December quarter. The result of a double-digit decline in sales will come after five quarters.
Hero MotoCorp, the biggest two-wheeler maker, posted a 13 per cent decline over a year before in units sold, as demand remained subdued after demonetisation.
The Delhi-headquartered company had its best quarterly sales of 1.82 million units during the second quarter. Sales in the third quarter declined to 1.47 mn as the numbers in November and December were lower than in the corresponding months of 2015.
The government had announced demonetisation with effect from November 9, leading to a shortage of cash in the economy and an impact on purchases across sectors.
Automobile companies also faced a marginal rise in commodity material prices. Weak commodity prices in earlier quarters were a key factor in their profitability.
Analysts forecast a double-digit decline in both revenue and profits for Hero MotoCorp in the third quarter. An analysis by Kotak Institutional Equities anticipates a 13 per cent decline in revenue and of 15 per cent in profits.
Emkay said in its third-quarter outlook for the sector: “We expect two-wheelers to report weak numbers, given the impact on volumes due to demonetisation.”
Bajaj Auto, the country’s most-valued two-wheeler firm, is also expected to record a decline in profits and revenue over a year before after six quarters. It had a record profit of Rs 1,123 crore in the July-September quarter. Analysts anticipate a 10 per cent decline in third-quarter revenue and a two-three per cent drop in net profit.
Bajaj is the largest exporter of two-wheelers and the fourth-largest in the domestic market. It is also the largest three-wheeler manufacturer. The decline has come in both export and domestic markets. In the December quarter, it reported a 9.5 per cent and 17 per cent decline in two-wheeler and three-wheeler sales, respectively. Other than the volume decline, commodity prices will also weigh on the performance.
Ravi Sud, chief financial officer at Hero, told analysts in October that the impact of firm steel, rubber and plastic prices could translate into a cost increase of Rs 250-300 for every vehicle.
The two-wheeler industry had seen a low growth rate of three per cent in sales during FY16, especially due to flat performance in the motorcycles segment. A deficit monsoon had weighed on rural purchases. With the better rain and revised wages of government employees, they were hopeful of double-digit volume growth in FY17.
