Automobile companies along with Auto Ancillaries, FMCG and Aviation have announced the results for the quarter ended March 2017.
Sales of two wheelers registered a growth at 6.89 percent during April-March 2017 over April-March 2016. Within the two wheelers segment, Scooters, Motorcycles and Mopeds grew by 11.39 percent, 3.68 percent and 23.02 percent respectively in April-March 2017 over April-March 2016.
The two wheelers OEMs have reported dismal performance for the fourth quarter ended March 2017. Demonetization was cited as the single biggest reason for the flat to negative revenue growth.
Eicher Motors was the only company that bucked the trend with an impressive higher double digit growth in revenue and profit. This stellar growth came on account of its product offering being unique and catering to the niche market in the motorcycle category of the two wheeler segment.
The Union Budget announced tax cuts for income between Rs.2.5 lakh to 5 lakh slab which will increase the disposable income in the hands of the middle class people. The implementation of the 7th Pay Commission and decent monsoon in the year may give a boost to automobile demand in the near future and help make up the lost ground due to demonetization. Healthy monsoon may also prop up demand for automobiles in the rural areas.
The P/E ratio at which their stock prices are trade continues to be on the higher side for TVS Motors (50) and Eicher Motors (46) due to the expected growth in the scooter segment and motorcycle segment of two wheelers respectively. Hero MotoCorp and Bajaj Auto continue to witness lower valuations due to tepid growth with both at a P/E of 20.
The sales growth of Automobile industry for the Financial Year ended March 2017 has been impressive for Utility Vehicles in the Passenger Vehicles segment and for Scooters and Mopeds in the two wheeler segment.
The sales of Passenger Vehicles grew by 9.23 percent in April-March 2017 over the same period last year. Within the Passenger Vehicles, Passenger Cars, Utility Vehicles and Vans grew by 3.85 percent, 29.91 percent and 2.37 percent respectively during April-March 2017 over the same period last year.
Auto Ancillaries catering to the Passenger Vehicles segment of the Automobile industry have reported strong set of numbers. Motherson Sumi and Exide Industries which mainly supply auto components to the Passenger Vehicle segment have shown an impressive higher double digit growth in revenues. The rise in profitability has not kept pace with revenue growth for auto ancillaries as rise in raw material costs is the main reason.
The two-wheeler OEM results performance were mostly flat to negative due to demonetization, those supplying components to them have also reported flat to negative growth in revenues and profit.
Auto ancillary companies supplying to global OEM’s can face a sharp slowdown in growth as Electric Vehicles replace ICE vehicles in the production line. As the OEMs are witnessing a disruption in the Internal Combustion Engines (ICE) category the Auto Component manufacturers which supply parts specific to internal combustion engines may witness in future a huge disruption as their business depends on the demand for ICE vehicles. India is a global hub for manufacturing of Auto Components and any disruption in the traditionally driven vehicles would largely affect exports from India in the near future.
The P/E ratio continues to be on the higher side for Bosch (49) and Motherson Sumi (40) due to the expected growth in the Passenger Vehicles segment of auto industry. Two wheeler component suppliers are relatively cheaper in comparison due to tepid growth.
Majority of the FMCG companies have reported tepid growth in revenues and net profit for the last quarter of FY 2016-17. The volume growth had already been low or negative as demonetization affected sales of most of the companies in the third quarter of FY 2016-17. Volume growth, even though expected to recover in the coming quarters has not shown any sharp spike in the last quarter.
Hindustan Unilever reported a 4% jump in volume growth during the fourth quarter ended March 31, 2017, as compared with a 4% dip in volumes in the previous sequential quarter. Dabur reported a 2.4% volume growth sequentially.
Whereas the new entrant in the scene ,Patanjali group’s total sales touched Rs 105.61 billion during 2016-17, within which its FMCG business, Patanjali Ayurved, posted a revenue of Rs 93.46 billion. Its revenue continued to grow in triple digits even during the past two years, when all its peers witnessed muted growth owing to general slowdown.
With GST coming into effect from the second quarter of FY 2017-18, the consumer goods items are going to become cheaper. The reason by being that the Government has decided the new tax rates of goods and services under GST which will move many from the taxable bracket to the nil tax bracket and majority of the goods will be moved to the 18% tax slab.
A better than expected monsoon would be able to fuel rural demand, boost demand & consumption, bring down inflation and will help earnings growth of FMCG companies.
The valuations continue to be expensive for FMCG companies with the P/E being in the range of 38 to 51 for companies mentioned in the table. Implementation of GST along with an expected normal monsoon is keeping these stocks on the boil.
Interglobe Aviation and Jet Airways have reported their quarterly results and Spicejet is yet to report its results for the last quarter of FY 2016-17. The major drop in the net profit for the fourth quarter of FY 2016-17 comes on account of rise in the cost of Aviation Turbine Fuel (ATF) on a year on year basis.
However, stocks of domestic aviation companies have rallied sharply since the beginning of the calendar year 2017 as macroeconomic factors are supporting to improve the topline and the bottomline of airline companies. Companies such as SpiceJet, Jet Airways and InterGlobe Aviation which together command 71% of the domestic market share have seen an increase in the value of their stocks by 106%, 49% and 36% respectively.
Favourable movement of the price of crude oil followed by appreciation of the INR against the USD is expected to reduce costs for airline companies in the coming quarters of FY 2017-18. Brent crude oil prices have declined 14.25% to 48 USD per barrel and the USD has depreciated 6% against the INR in the last quarter of the FY 2016-17.
Fuel, maintenance and lease costs are dollar denominated and any decline in dollar price relative to the rate of the rupee reduces costs for airline companies. Lower crude oil prices benefit aviation firms as jet fuel prices, which typically constitute a majority of airlines’ operating costs, are directly linked to international crude oil prices. Indian aviation companies with around 65% of their costs linked to the USD would be the biggest beneficiaries of the INR appreciation. Movement of INR (appreciation against the USD) has high significance for the aviation industry in India.
A sustained strength of the INR would increase the earnings per share for airline companies. The favourable impact of the price movement of crude oil and the rupee along with strong growth in air traffic would be visible in the upcoming quarterly performance of companies and if the momentum continues then the performance would continue to reflect in following quarters of the FY 2017-18.
Integlobe Aviation continues to trade with a P/E of 24 and Jet Airways is far behind at 12.