Demonetisation, BS III ban, raw material costs to play spoilsport in Q4 automobile results

The fourth quarter of financial year 2016-17 saw various macro events play spoilsport to automobile companies results. Several macro and regulatory headwinds will curtail their results growth in Q4FY17 this includes the impact of demonetisation, input cost pressure and the Supreme Court (SC) ban on the sale of Bharat Stage III emission vehicles.

The impact of demonetisation was most visible on two-wheelers and three-wheelers that saw a 2% and 24% decline in sales year on year (YoY). This was owing to a disruption in the rural demand.

“In the two-wheeler space, companies struggled to ramp up volumes in the shadow of demonetisation. The first two months of 4QFY17 were subdued, followed by a strong pick-up in volumes in March 17, owing to higher discounts offered by companies to clear their BS-III inventory,” said a HDFC Securities report. It further added, “We expect two-wheeler companies to have a tough quarter, with EBITDA for Hero Motocorp or Bajaj Auto, declining by 16 or 17% YoY respectively,” it said.

The passenger vehicle (PV) was the least impacted and managed to sustain an over 8% YoY growth momentum. This was driven by recent launches and long waiting period models like Vitara Brezza, Baleno, Fortuner, Kwid and Tiago.

Apart from demonetisation and the BS III ban, the average prices of key commodities has increased such as CR steel sheet up 8% quarter on quarter (QoQ), lead up 6.5% QoQ, aluminum up 8% and rubber up 21% QoQ. However, due to the liquidity crunch and pressure to dispose off BS III inventory, automobile companies were unable to increase prices to offset the pressure of escalating commodity prices.

Three-wheeler volumes remained disappointing as its growth declined by 24% YoY in 4QFY17, dragged by weak rural demand owing to demonetisation and concern in the export markets, mainly in Africa (shortage of dollars). “We believe that the rural and export three-wheeler demand may take some more time to get back in shape,” the report said.

However, the report said that post the demonetisation exercise the stage is set for a revival in the automobile demand in FY18 and FY19 on the back of increase in government capital spending and focus on rural economy, higher rural income with normal monsoons, higher disposable income with roll-out of 7th Pay Commission, falling interest cost and low base effect.