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Auto firms mull another price hike as soaring input costs erode margins

Automobile makers are under pressure as steel has risen 50 percent in nine months and other costs are also soaring, although companies had earlier expected raw material costs to soften

July 27, 2021 / 11:33 AM IST
Representative image

Representative image

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The automotive industry may be bracing for the third round of price hikes in recent months as raw material costs continue to soar because of the relentless surge in steel and precious metal rates.

Companies that manufacture everything from scooters to heavy trucks have already raised prices a couple of times since April because of higher raw material costs.

The surge in input costs comes against the broader expectations of softening of raw material prices as per guidance given by the auto companies during the April-June quarter.

Speaking to Moneycontrol PB Balaji, chief financial officer, Tata Motors said, “We did expect some degree of softening of raw material prices but that has not been the case and steel in particular has been a runaway and along with that are the precious metals which are inflating very fast.”

Tata Motors has raised prices by 1-2.5 percent across commercial vehicles (CV) in July after a 2.5 percent hike seen in April. The Mumbai-based company is the market leader in the CV segment. In passenger vehicles (PV), Tata Motors raised prices to the tune of 1.8 percent in May but is yet to take a call for the second round.

“The first round of price hikes in CVs as the market leader is already taken and for PVs, we will follow the leader there. But the inflation is significant and its impact on margins is also significant and therefore we will do our best to mitigate it through our cost reduction plan but beyond a certain point we will have to look at price hikes,” Balaji added.

In a regulatory filing in June, car market leader Maruti Suzuki announced a price hike to be effective in the July-September quarter.

Commodity prices are expected to remain at multi-year highs in the first half of FY22 (resulting in multi-year high average in FY22), before softening in the second half of the year, as per report from rating and market intelligence company ICRA.

Bajaj Auto, the country’s third-largest two-wheeler brand, has undertaken a 5 percent increase in prices across products between Q1 and Q2 FY22 and is evaluating opportunities for passing on further increases.

The Pune-based maker of Pulsar motorcycles said it faced strong headwinds of cost increases to the tune of 3.7 percent in Q1 of which it could recover only about 1.5 percent keeping demand sensitivities in mind during that quarter.

Rakesh Sharma, executive director, Bajaj Auto said, “We announced new pricing in early July through which we recovered two-thirds of the increase in raw material costs but there is still some work to do. We will evaluate further scope as the quarter progresses. We expect Q2 to be better than Q1 in terms of demand.”

Unlike the PV segment, demand for two-wheelers has been sluggish since the unlocking of markets in mid-June. The pent-up demand which was very strong in FY21 has remained muted in FY22 leading to higher than desired inventory levels at dealerships. Two-wheeler makers will have to factor in the demand trend when deciding on price hikes.

Soumen Ray, Chief Financial Officer, Bajaj Auto said, “We have seen further increase in input cost in Q2. We hoped that Q2 would be muted but it is as aggressive as Q1 was. In nine months, steel prices have gone up by 50 percent. I have never seen such a sharp surge in commodity prices. Steel continues to remain hot. The rate of increase in nickel and zinc has come down but their prices have not.”

Mahantesh Sabarad, Head - Retail Research, SBICAP Securities said, "Historically automobile companies have always raised prices on various pretexts be it raw material cost increase, new model features or even excise (now GST) increases irrespective of demand conditions. This time is no different. When you raise prices when demand is weak, you do not further constrain it as the buyers who do come to market are the ones who have the need or necessity to buy a car. Besides, bank loan interest rates are at near historical lows."

Swaraj Baggonkar
first published: Jul 27, 2021 11:33 am

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