The increasing raw material costs – prices of key commodities like steel, aluminium and rubber continue to soar – are expected to bring down the profitability of automakers going ahead.
Despite slowdown in the market, auto companies recently hiked prices ahead of the festive season, citing increase in raw material prices. Some of the companies have already indicated that higher raw material costs will put pressure on profitability in the second half of the year.
For instance, in their recent earnings calls with analysts, Hero MotoCorp and Bajaj Auto, the two biggest motorcycle makers, indicated that higher raw material prices will impact the margins in the second half of this fiscal.
Analysts feel that going ahead, companies will not be able to further pass on such input cost hikes, which, in turn, is expected to impact their margins.
Raw material prices, which remained stable for almost a year, started rising due to rupee depreciation. Prices of steel (which forms a large part of vehicle-making) rose from Rs112 a kg in Q1 to Rs134 a kg now. “The landed costs of commodities like steel and aluminium have gone up due to rupee depreciation. The actual impact will start happening in the current quarter (October-December), as steel-makers and auto and component companies have quarterly or half-yearly contracts,” said Surjit Singh Arora, analyst with Prabhudas Lilladher.
“Companies like Bajaj Auto will see a pressure on margins due to higher raw material costs and product mix in Q3. Two- and four-wheeler companies have taken a price hike but they may not be able to pass on any further increase in input costs,” said another analyst with a domestic brokerage.
The ongoing festival period is expected to remain flat compared to last year’s, according to dealers and auto manufacturers. “We have seen an increase in numbers for Q3. However, on a like-to-like basis for the industry per se, things look flat. Much depends on how the market picks up during Dhanteras and Diwali,” Ravi Sud, senior vice-president and CFO, Hero MotoCorp, told analysts in an earnings call.