This week, India’s four largest automakers reported results that split into two groups. Two-wheeler makers increased profits. Carmakers did not, even though both groups sold more vehicles than a year ago.
On Wednesday, Hero MotoCorp, the world’s largest maker of motorcycles and scooters, reported consolidated revenue of ₹14,971 crore, up 23%, and profit of ₹1,861 crore, up 41%.
That profit includes a one-time gain of ₹397 crore from revaluing its stake in an associate company after that company raised capital, almost certainly Ather Energy, the electric scooter maker in which Hero is a major shareholder.
Excluding that gain, profit growth was more modest, but sales were strong: Hero sold 18.68 lakh vehicles in the quarter, up 10%, and its share of new registrations improved in each month of the quarter.
On Tuesday, Bajaj Auto reported record figures. Standalone profit rose 35% to ₹3,354 crore, exports grew about 40%, and its EBITDA margin widened to 20.9%.
The carmakers’ results were very different. Hyundai Motor India reported a 24% fall in standalone profit to ₹1,189 crore on Wednesday. On Tuesday, Maruti Suzuki reported a 27% fall to ₹2,415 crore, even though it sold a record 6.97 lakh cars and had about 2 lakh orders still waiting to be filled.
Why the gap
Demand explains part of it, but the main factor is how much of each vehicle’s cost is commodities.
A car contains far more steel, aluminium, copper, plastic, rubber and electronics than a motorcycle, and these materials make up a larger share of its price.
When the war in the Gulf pushed commodity prices sharply higher, carmakers felt it most. Maruti’s raw material costs rose 48% in the quarter, almost twice as fast as its revenue, and its EBITDA margin fell from 12% to under 9%.
Two-wheeler makers face the same higher prices, but on much less material per vehicle. They have also been able to raise prices more easily. A ₹2,000 increase on a ₹90,000 motorcycle attracts much less notice than a ₹30,000 increase on a ₹7 lakh hatchback.
The product mix is also helping two-wheeler makers. Premium motorcycles, electric scooters and exports all earn higher margins. Bajaj’s exports to Africa, Latin America and Southeast Asia grew strongly, and a weaker rupee makes that revenue worth more in rupee terms.
Where is the demand
Demand is not the problem for either group. Maruti has a large order backlog, Hero is gaining market share and Bajaj sold more than ever. Indian consumers are still buying vehicles. Higher fuel prices may even be helping parts of the market: Maruti said demand for CNG cars and small cars is strong, which suggests buyers are choosing vehicles that cost less to run.
The weakness is in profit per vehicle, and for carmakers that depends on commodity prices, which depend largely on events in the Strait of Hormuz.
The coming months
The festive season should help both groups. Diwali falls on 8 November, and much of the festive buying was pushed into October this year. The October sales figures, due in a few days, will show whether volumes stay strong.
For carmakers, the key question is pricing. Maruti’s margins improved from the June quarter, which suggests its price increases are starting to work. If commodity prices stabilise and those increases hold, the December quarter should be better. If oil rises further or the conflict escalates, carmakers will face another quarter of margin pressure.
Two-wheeler makers are in a stronger position for now. Their costs are lower relative to price, they have more pricing power, and their exports are growing. This season, they have handled the commodity shock much better than carmakers.
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