A sharp drop in operating margins, particularly for the two-wheeler segment, could see negative growth in operating profit. Aggregate net profit for the sector is expected to decline by a substantial 10 per cent.

Analysts at stock broking houses Motilal Oswal, Religare Securities, IL&FS Investsmart and Sharekhan say that while Maruti Udyog [Get Quote] is doing well, the other biggies Tata Motors [Get Quote] and Mahindra & Mahindra would have weak single-digit performances that could lead to a decline in net profit.

The off-take of two-wheelers continue to show a drop in the second quarter, which is why analysts expect a double-digit decline in sales turnover and a more than 20 per cent drop in net profit in this segment.

They are concerned that handicapped by the increasing interest burden, the four-wheeler segment also might see a decline in sales and profits, notwithstanding the 25-30 per cent growth in sales and profit by Maruti.

Sales of medium and heavy commercial vehicles and motorcycles has continued to be slow.

However, the passenger cars segment has maintained its growth momentum, with successful new product launches and line extensions by major players enabling the sector to outperform other segments.

Mixed performance

Motilal Oswal expects the sector to show a modest 5.9 per cent increase in sales even if operating profit and net profit take a dip.

Ashok Leyland [Get Quote] is expected to do well, but Tata Motors (of the commercial vehicles pack) and Bajaj Auto [Get Quote] and TVS [Get Quote] Motors (in two-wheelers pack) would be the worst affected.

Eicher Motors [Get Quote] and Maruti are expected to post robust double-digit growth in sales and profit, but while sales growth would be good for Mahindra & Mahindra, net profit growth would be negative.

Subdued top line

IL&FS Investsmart believes that the topline for the industry would remain subdued for the second quarter, mainly due to volume contraction especially in the motorcycles and medium and heavy commercial vehicles segments.

Product weariness and rising interest rates is also likely to restrain growth in these segments. Operating margins are likely to remain under pressure due to increasing input costs and intensifying competition.

Some causes

Religare believes two-wheeler firms would show an 8.5 per cent decline in sales and a more than 20 per cent drop in operating profit.

The margin drop would be due to aggressive pricing, inability to pass on the hike in raw material costs to consumers, and higher spending on advertisements.

Four-wheelers, particularly commercial vehicles, had it tough due to higher interest rates and tight liquidity. This has impacted sales of trucks as operators postponed purchases. Car sales bucked the trend with new model launches and discounts.

Religare expects the four-wheeler firms it tracks will report a growth of 8.7 per cent in revenues, 8 per cent in operating profit and 4.9 per cent in net profit. But operating margins and adjusted net profit margins would decline by 6 and 27 basis point respectively, it says.

More problems

Sharekhan says subdued volumes would hamper performance of the sector. The slowdown has continued in the second quarter as volumes declined on the back of higher interest rates, the seasonal effect of the monsoons and the high base of the last year.

The two-wheeler segment has been worst affected by the higher cost of credit and product fatigue. Commercial vehicle sales also remained low due to lower freight availability during the monsoons, the high base of FY2007 and loosening of the ban on overloading. 

The surprise remains the passenger car segment, where growth has been led by numerous new launches.  Operating profit margins are expected to be under pressure for the whole sector on account of decline in the sales volumes.