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File photo used for representational purpose (Bloomberg)
File photo used for representational purpose (Bloomberg)

'Higher auto prices, modest supply disruption may push sales volume down'

  • High commodity prices and lower sales volume will pressure Indian automakers' margins after an improvement in the December quarter of the ongoing financial year, as per a report.

Higher vehicle prices and a modest supply disruption due to the shortage of semiconductors are expected to push auto sales volume down on a sequential basis, after improvement in the December 2020 quarter, according to a report.

This is notwithstanding the expectation that resilient demand after the November festive season last year will support higher volume in the March 2021 quarter from a low base last year and result in a stronger operating performance than expectations, Fitch Ratings said in its report said on Thursday.

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It said the overall sales volume in the March 2021 is likely to be somewhat lower than that in the October-December period. This will negatively affect fixed cost absorption despite automakers' cost-saving initiatives, and result in lower operating margins, the agency added.

The March 2021 quarter volumes are expected to be higher from a year earlier, as the start of lockdowns caused wholesale volume to decline 51 per cent for passenger vehicles (PVs), 88 per cent for commercial vehicles (CVs) and 40 per cent for two-wheelers in March 2020, according to the report.

High commodity prices and lower sales volume will pressure Indian automakers' margins after an improvement in the December quarter of the ongoing financial year, it said.

(Also read | PV retail sales dip 4% in January as chip shortage impacts vertical: FADA)

Significantly, most of the automakers in the country have revised upward their vehicle prices from January, owing to increase in commodity prices and various other input costs.

Material costs typically amount to more than 60 per cent of automakers' revenues.

Prices of key raw materials, including steel and copper, increased in double digits after the second quarter FY21. However, the impact on automakers' profitability was limited in third quarter of FY21, as their stronger bargaining power with suppliers facilitated a lag of three-four months in passing on higher costs, Fitch said.

Stating that the price hikes announced by automakers in January will not fully offset higher costs, it said sustained high commodity prices imply the cost impact will be more visible in the March 2020 quarter.

"We believe this will result in moderately lower gross margins," the ratings agency said.

The price hikes will add to the higher cost of ownership, especially amid increasing retail fuel prices after the June quarter, which may delay the recovery in PV sales volume, Fitch said.

(Also read | Asian chipmakers rush to boost production to meet global shortage)

The global semiconductor shortage is likely to affect the production of many Indian automakers over the next several months. However, the overall impact on car production is likely to be limited to single-digit declines, said the report.

It added that the dominant Japanese and South Korean carmakers, which together account for more than 65 per cent of production volume, have reported no significant disruptions so far.

According to Fitch, most Indian automakers reported improved operating margins in the December 2020 quarter on the back of higher volume, which helped to offset the increase in material costs. The domestic PV wholesale volume during the quarter increased 14 per cent y-o-y and 23 per cent from the previous quarter, Fitch said, citing SIAM data.

Two-wheeler wholesale volume rose 13 per cent y-oy in Q3FY21, benefitting from healthy rural demand, it said.

This story has been published from a wire agency feed without modifications to the text.

  • First Published Date : 11 Feb 2021, 04:14 PM IST