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Higher Costs Worry Auto Ancillary Makers

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While Bharat Forge, which has a clause to pass on any hike in input cost to customers, is expected to report higher quarterly profits, battery maker Exide Industries and Motherson Sumi Systems may see relatively muted results, a Reuters poll of brokerages showed.

"There is volume growth in the auto ancillary sector, demand is robust and there is no issue in terms of revenue. But the issue is margins, the issue is higher commodity prices. This is a theme across the industry." said Mayur Milak, analyst at Alchemy Share and Stock Brokers.

Auto sales in India grew a record 30 per cent in 2010/11 to 1.98 million units, driven by a burgeoning middle class in Asia's third-largest economy, with easier access to loans and a wider choice of models.

But higher input costs and interest rates are seen crimping demand for cars and sales growth is expected to more than halve in 2011/12 to 12-15 per cent.

The growth of the Indian auto component industry is directly linked to the auto sector's growth and has more than 65 per cent of its domestic sales to OEMs (original equipment manufacturers), Angel Broking said in a research note.

Bharat Forge, the world's second largest forgings maker, is expected to report a 39.6 per cent rise in fourth quarter net profit as sales jump over 49 per cent, the poll showed.

"For Bharat Forge, I expect this quarter to be the best among the four. I expect the output to be the highest in the fourth quarter and accordingly revenues will be high. Its margins would remain more or less stable as the company has a pass through agreement with OEM customers," Milak said.

Strong domestic vehicle growth and higher capacity utilisation will also drive Amtek Auto's profits and sales in Jan-March, analysts said. Amtek is expected to report a 46.4 per cent rise in quarterly net profit.

But the quarter will not be equally strong for others like Motherson and Exide as higher costs are likely to counter a rise in sales.

"Exide's margins have been under pressure over the last two quarters because of higher lead prices and slowdown in industrial business. Their profitability is expected to be down," said an analyst from a local brokerage who declined to be named. The industrial segment accounts for 30-35 per cent of the firm's revenue.

"Also, Exide is catering to OEMs on a priority basis and margins on OEM side is lower than replacement segment."

Exide's Oct-Dec earnings had missed analysts' forecast, as demand from automakers forced it to deploy capacity away from the more profitable after-market business.

"Motherson Sumi would see a good growth in sales, but because of margin pressure PAT (profit after tax) would be hit. This is mainly due to increase in raw materials like copper, as well as other costs," the analyst added.

Motherson has a pass-on clause with customers, but the hike in costs is usually passed on with a lag effect.

Motherson Sumi will benefit from the strong growth in domestic passenger car sales - a significant chunk of its local business - but new orders at European subsidiary Visiocorp are yet to pick up, another analyst said on condition of anonymity.

A pick-up in orders was expected from the third quarter which will further push consolidated sales, she added.

Motherson's consolidated net profit is seen falling 17 per cent to 1.17 billion rupees this quarter, while sales could rise 16 per cent to 22.36 billion rupees. Exide Industries net profit may dip 1 per cent despite a 13 per cent rise in sales.

Exide and Amtek Auto will report results in the last week of April, Motherson and Bharat Forge in May.