A rise in demand for automobiles in the last couple of months has led to a concurrent rise in raw material prices, thereby putting pressure on the fragile recovery of operating margins of auto companies.
Some of the vehicle makers that Moneycontrol spoke to said that input materials like steel, aluminium and natural rubber have seen a spike in prices, beginning October. Natural rubber prices have hit a 4-year high while aluminium prices are at a 17-month high.
Prices of steel, aluminium, copper, lead and rubber have inched up higher in the past month and will add to commodity price pressure for ancillaries. This will adversely impact margins for the auto component industry, investment information and credit rating agency, ICRA, said in a report.
Auto companies were banking on the Navratri-Dussehra period to drive up retail volumes (dealer-to-consumer sales). Dussehra, which marks the culmination of the 9-day Navaratri festival, was celebrated on October 25.
Initial reports from the dealers, passenger vehicle demand has remained upbeat while two-wheeler demand has remained subdued during the period, which is considered auspicious. The Federation of Automobile Dealers Association will issue sales data for the entire festive period after Diwali, which falls on November 14.
A hike by auto component makers usually forces vehicle makers to readjust their pricing. When demand is upbeat, companies tend to pass on only a part of the hike to the consumers due to fear of hurting demand and competitive pressures.
However, in a muted-demand scenario, companies are forced to pass on almost the entire quantum of the price hike to protect their operating margins.
Anuj Khaturia, Chief Operating Officer, Ashok Leyland, said: “There is pressure on the commodity side. Prices of all steel products, flat products, castings and forgings, have inched up and steel is a major input material.”
While the shift to Bharat Stage VI from April 1, 2020, pushed the prices of all vehicles higher by 10-12 percent, some companies have hesitatingly hiked prices before the start of the festive season.
Companies hike prices
Unlisted automotive companies like Yamaha, Renault, Hyundai, Mercedes-Benz and BMW and listed companies like Hero MotoCorp, TVS Motor Company and Bajaj Auto have increased prices in the last two months.
Steel companies are understood to be negotiating supply contracts for the next six months with auto companies for better prices, fuelling the possibility of a price hike in the immediate future, too.
Soumen Ray, Chief Financial Officer, Bajaj Auto, said: “We have taken a price hike in the domestic two-wheeler segment in early October. It was between 1.5-2 percent. There is a bit of competitive pressure and we are into the festive season. We do not know to what extent the price hike will offset the raw material price hike because the contracts did not get closed at that time but we will substantially mitigate the impact.”
Bajaj Auto, the country’s third-largest two-wheeler seller in India, clocked a 24 percent increase in domestic two-wheeler sales during September 2020, making it the second consecutive month of positive growth for the Pune-based company. During September, the rest of the two-wheeler industry managed to grow by 12 percent, as per data shared by the Society of Indian Automobile Manufacturers (SIAM).
CV segment hit hard
The commercial vehicle (CV) segment has been one of the two worst-hit segments (other being three-wheeler passenger) since the start of April. As per SIAM data, CV sales were 56 percent down during April-September 2020, compared to the same period last year.
Though the recovery in demand, especially for heavy trucks, is very slow, it has not stopped Chennai-based truck and bus major Ashok Leyland from announcing a price hike.
“We had increased prices on our products in the first week of October on multi-axle rigid trucks and tippers. Its quantum varied, depending on the product type, in the range of 1.5-2 percent,” added Khaturia.
For the time being, tyre-making companies are not facing as much heat as vehicle and component makers. The price rise of natural rubber is offset by benign crude oil prices and its derivatives. Natural rubber and crude derivatives determine 90 percent of the cost of the tyre.
Anshuman Singhania, Managing Director, JK Tyre and Industries, said: “Prices of raw materials remained subdued in the September quarter and are expected to remain steady in the coming months.”
Price hikes are negated to some extent by discounts offered on select models, especially those which are low on demand. Direct cash discounts, discounted annual maintenance contracts, free accessories and added exchange bonuses are some of the offers through which companies are trying to attract buyers.