Q4 earnings watch: The auto sector is stuck in a profit jam. Why the squeeze?
In the latest edition of Mint’s Q4FY25 earnings coverage, we analyze the performance of the automobile and ancillary sector. The sector has once again met with the challenge of rising input costs that is squeezing its margins despite having an impressive topline growth.
India's automobile and ancillary sector is caught in a profit jam. Despite companies shifting gear with sales, soaring input costs are preventing a similar upshift in their earnings, creating a troubling scenario where more revenue doesn't translate to proportional profits.
A recent Mint analysis of 53 automobile and ancillary firms reveals this troubling disconnect between revenue and profit performances in the March quarter of fiscal year 2024-25. While these companies achieved an impressive 11% year-on-year revenue growth in Q4, up from 7.3% in the previous quarter, their net profit managed only a modest 2% increase during the same period. A company-wise breakdown reveals that nearly half of all firms (46%) experienced a net profit contraction in the March quarter.
The analysis is based on standalone data sourced from the Capitaline database covering companies that have released their latest quarterly financial results.
Automobile and ancillary firms grappled with consistently weak net profit growth through most of fiscal 2024-25. Though the March quarter offered some muted improvement, which was preceded by two quarters of contraction. Revenue growth, however, maintained steady momentum after a Q2 slowdown.
Also Read: Q4 earnings watch: Demand slowdown puts FMCG’s ‘fast-moving’ tag to test
This widening gap between revenue and profit growth became the defining characteristic of the auto sector's performance throughout most of fiscal 2024-25. The pressure on net profit margins was palpable, as they declined to a sluggish 8.2% of revenue, marking the slowest and a continued downward trend across all quarters.
While net profits did recover sequentially in the final quarter of 2024-25, growth remained subdued compared to the expansion seen in topline.
The March quarter's profit squeeze was likely a direct consequence of renewed surges in input costs, coming after a brief breather in the December quarter. Raw material costs, as a share of net sales, jumped to 58.2% in the March quarter—nearly hitting September's peak of 59%, which precisely marked the sector's first net profit contraction in FY25.
The current cost structure represents a stark erosion of profitability compared to the previous year's March quarter. Input costs stood at a more contained 55.8% of net sales then, enabling the sector to achieve impressive 18% profit growth fueled by 12% revenue growth.
This trend highlights a key challenge: rising raw material costs are effectively eroding the benefits of revenue growth, leaving auto companies struggling to preserve their profit margins.
This is the eleventh part of a series of data stories about the ongoing Q4 earnings season. Read previous parts of our earnings series here.
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