Semi-conductor crunch, high input costs to crimp Q2 show for auto sector

Automakers are expected to report muted earnings for the quarter that ended in September, show the average estimates of four brokerages including Motilal Oswal, Yes Securities, IDBI Capital and Phillip Capital. While supply constraints led by the semiconductor shortage weighed on the passenger vehicle volumes, a tepid demand in the domestic market kept two-wheeler sales in check.

As a result, the cumulative profit after tax (PAT) for the auto universe. Among the Nifty 50 companies (including Tata Motors consolidated) is expected to swing in a year-on-year (YoY) loss of Rs 399 crore against a cumulative profit of Rs 4,395 crore.

The loss will primarily be driven by Tata Motors which is expected to report a loss of over Rs 4,000 crore for the quarter. The UK subsidiary of the Tata Group flagship has been facing supply related issues due to the chip shortage. This in turn has dented the company’s volumes in a big way.

JLR’s retail sales for the second quarter ending September 30, 2021 were 92,710 vehicles, 18.4 per cent lower than the 113,569 vehicles sold in Q2 last year, the company said in a statement on Monday. This a major step-down for the firm which clocked close to 150,000 units in the pre-pandemic phase.

“The global semiconductor supply issue represents a significant near-term challenge for the industry which will take time to work through,” Lennard Hoornik, chief commercial officer, Jaguar Land Rover said in the statement.

Cumulative net sales for the universe for the three-month period is estimated to advance 4.4 per cent to Rs 1,07,062 crore from Rs 1,02,544 crore a year ago.

A negative operating leverage (YoY) owing to lower volumes and a persistent increase in raw material costs is also expected to adversely impact the Ebitda (earnings before interest, tax, depreciation and amortisation) margins of companies in the auto universe.

Brokerage Yes Securities expects the margins in the auto universe (excluding JLR) to contract 8.8 per cent against 12 per cent in the year ago quarter. The year-on-year margin contraction is largely attributable to higher raw material costs– lead up by 24 per cent, copper 43 per cent aluminium 55 per cent and rubber 1 per cent. Margins including JLR are likely to contract 540 basis points YoY.

Other brokerages also expect the inflationary trend to have an adverse impact.”We expect the raw material headwinds to impact earnings in the second quarter of FY22. However, the same should improve going forward with commodity prices softening from the third quarter of FY22.” according to a research report by Axis Equities Research.

Meanwhile, even as demand for PV and commercial vehicles remained strong, the chip shortage deepened in the months of August and September resulting in production cuts and a volume impact of 40 to 45 percent. A low inventory at the PV sales channels is likely to dampen festive seasons volumes.

Even as a weak domestic demand is set to crimp earnings of the two wheeler-manufacturers, a strong exports is expected to offset the decline to some extent. Two wheeler sales declined by ~11 per cent YoY in Q2, owing to a high base on account of inventory filling last year. In comparison, exports saw strong ~42 per cent YoY growth, driven by high demand and stable forex rates in African/Latin American markets.

Brokerage Emkay Global sees revenue growth at 23 per cent for Bajaj Auto and 17 per cent for TVS Motor, while a decline is expected of almost 16 per cent for HeroMoto Corp 4 per cent for Royal Enfield. The volume is expected to pick up in the second half on improving macros, positive rural sentiments and improving chip supplies, it said in a note.

Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.

We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor