The consistent rise in raw material prices such as steel has come as a double whammy for auto makers who are staring at poor operating margins
Sports utility vehicle specialist Mahindra & Mahindra (M&M) was able to pass on only half of the raw material price increase to its customers, while absorbing a significant chunk for fear for hurting retail demand.
Passenger vehicle demand has remained disappointingly low over the past four months forcing car makers to increase discounts to liquidate stocks. The consistent rise in raw material prices such as steel has come as a double whammy for automobile companies who are staring at poor operating margins.
Pawan Goenka, Managing Director, M&M said, “There has been an increase of 250 basis points in raw material prices and more than that for tractors. We have passed on only half of that to customers while absorbing some of it.” (100 bps = 1 percentage point)
Korean car maker Hyundai too has been reluctant to pass on the increase to its buyers. The company has not made any across the board hike in its product range. Maruti Suzuki did not raise prices again after August despite depreciation of the Indian currency hurting its bottomline.
In a conference call, Ajay Seth, CFO, Maruti Suzuki, said, “There is no thought at the moment on price increase. We have to examine how the market goes. At the moment, the market is flat. So, we will have to consider all those factors before any decision on this has to be taken.”
Despite a flurry of festive days, PV sales rose only 1.55 percent year-on-year in October to 2.84 lakh units, according to data shared by the Society of Indian Automobile Manufacturers. During Diwali, dealers reportedly struggled to convert consumer walk-ins and enquiries to confirmed bookings and orders.
A combination of a variety of factors such as rise in insurance premiums, fuel price hikes, tightening of lending norms for auto loans and negative buyer sentiment have hurt car demand in recent months.
Manufacturers are hoping that pre-buying in 2019 will offer them an opportunity to hike prices. Buyers will be bringing forward purchases next year to beat the price hike due in 2020 for Bharat Stage VI upgradation. Prices of cars are expected to go up by as much as Rs 1 lakh.
“When commodity prices go up rapidly, we never pass it on immediately. These things go in cycles. Next year, commodity prices may even go down and then you undertake an increase to make up for this year's loss,” Goenka added.Margins of all publicly listed manufacturers have taken a hit due to high commodity prices and foreign exchange impact. Several of these car makers said raw material prices are expected to remain firm for the remainder of the year.